1)Loan Amortization

Your company is planning to borrow $1.25 million on a 5-year, 9%, annual payment, fully amortized term loan.

What fraction of the payment made at the end of the second year will represent repayment of principal? Do not round intermediate calculations. Round your answer to two decimal places.

 %

2)

Required Annuity Payments

Assume that your father is now 50 years old, plans to retire in 10 years, and expects to live for 25 years after he retires – that is, until age 85. He wants his first retirement payment to have the same purchasing power at the time he retires as $60,000 has today. He wants all his subsequent retirement payments to be equal to his first retirement payment. (Do not let the retirement payments grow with inflation: Your father realizes that if inflation occurs the real value of his retirement income will decline year by year after he retires). His retirement income will begin the day he retires, 10 years from today, and he will then receive 24 additional annual payments. Inflation is expected to be 5% per year from today forward. He currently has $150,000 saved and expects to earn a return on his savings of 10% per year with annual compounding.

How much must he save during each of the next 10 years (with equal deposits being made at the end of each year, beginning a year from today) to meet his retirement goal? (Note: Neither the amount he saves nor the amount he withdraws upon retirement is a growing annuity.) Do not round intermediate calculations. Round your answer to the nearest dollar.

$ 

3)

Interest rate premiums

A 5-year Treasury bond has a 3.2% yield. A 10-year Treasury bond yields 6.8%, and a 10-year corporate bond yields 9.25%. The market expects that inflation will average 3.75% over the next 10 years (IP₁₀ = 3.75%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

What is the yield on this 5-year corporate bond? Round your answer to two decimal places.

4)

Interest Rate Sensitivity

A bond trader purchased each of the following bonds at a yield to maturity of 10%. Immediately after she purchased the bonds, interest rates fell to 7%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

What is the percentage change in the price of each bond after the decline in interest rates? Assume annual coupons and annual compounding. Fill in the following table. Do not round intermediate calculations. Round your answers to two decimal places.

5) CAPM, portfolio risk, and return

Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.)

Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

• What is the market risk premium (r_M – r_RF)? Round your answer to two decimal places.

• What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

• What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

• Would you expect the standard deviation of Fund P to be less than 14%, equal to 14%, or greater than 14%?

  • less than 14%

  • greater than 14%

  • equal to 14%

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_____ I II III 

6) Expected Returns: Discrete Distribution

The market and Stock J have the following probability distributions:

• Calculate the expected rate of return for the market. Do not round intermediate calculations. Round your answer to two decimal places.

   %

  Calculate the expected rate of return for Stock J. Do not round intermediate calculations. Round your answer to two decimal places.

   %

• Calculate the standard deviation for the market. Do not round intermediate calculations. Round your answer to two decimal places.

   %

  Calculate the standard deviation for Stock J. Do not round intermediate calculations. Round your answer to two decimal places.

   %

7)

Expected and Required Rates of Return

You have observed the following returns over time:

Assume that the risk-free rate is 5% and the market risk premium is 6%.

What is the beta of Stock X? Do not round intermediate calculations. Round your answer to two decimal places.

What is the beta of Stock Y? Do not round intermediate calculations. Round your answer to two decimal places.

• What is the required rate of return on Stock X? Do not round intermediate calculations. Round your answer to one decimal place.

• What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Do not round intermediate calculations. Round your answer to one decimal place.

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What is the required rate of return on Stock Y? Do not round intermediate calculations. Round your answer to one decimal place.

 %

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8)

Corporate valuation

Dantzler Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 8% rate. Dantzler’s WACC is 13%.

• What is Dantzler’s horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55.

• What is the firm’s value today? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round your intermediate calculations.

• Suppose Dantzler has $124 million of debt and 40 million shares of stock outstanding. What is your estimate of the current price per share? Round your answer to two decimal places. Write out your answer completely. For example, 0.00025 million should be entered as 250.

$  million

$  million

$ 

9}NPV profiles

A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.39 million per year for 20 years. Plan B requires a $15 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $3.36 million per year for 20 years. The firm’s WACC is 9%. Calculate each project’s NPV. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55.

Plan A: $  million

Plan B: $  million

Calculate each project’s IRR. Round your answer to two decimal places.

Plan A: %

Plan B: %

• By graphing the NPV profiles for Plan A and Plan B, approximate the crossover rate to the nearest percent.

• Calculate the crossover rate where the two projects’ NPVs are equal. Round your answer to two decimal places.

• Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value? The input in the box below will not be graded, but may be reviewed and considered by your instructor.

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10)Capital budgeting criteria

A company has a 11% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows:

• What is each project’s NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.

• What is each project’s IRR? Round your answer to two decimal places.

• What is each project’s MIRR? (Hint: Consider Period 7 as the end of Project B’s life.) Round your answer to two decimal places. Do not round your intermediate calculations.

• From your answers to parts a-c, which project would be selected?

• Construct NPV profiles for Projects A and B. Round your answers to the nearest cent. Do not round your intermediate calculations. Negative value should be indicated by a minus sign.

• Calculate the crossover rate where the two projects’ NPVs are equal. Round your answer to two decimal places. Do not round your intermediate calculations.

• What is each project’s MIRR at a WACC of 18%? Round your answer to two decimal places. Do not round your intermediate calculations.

Project A: $ 

Project B: $ 

Project A: %

Project B: %

Project A: %

Project B: %

_________ Project A Project B 

If the WACC was 18%, which project would be selected?

_________ Project A Project B 

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Project A: %

Project B: %