Finances

1035 words 5 pages
Workshop 2 Assignments

Answer the following questions:

1. The Lexington Property Development Company has a $10,000 note receivable from a customer due in three years. How much is the note worth today if the interest rate is a. 9%? b. 12% compounded monthly? c. 8% compounded quarterly? d. 18% compounded monthly? e. 7% compounded continuously?

SOLUTION: PV = FV [PVFk,n] a. PV = $10,000 [PVF9,3] = $10,000 (.7722) = $7,722 b. PV = $10,000 [PVF1,36] = $10,000 (.6989) = $6,989 c. PV = $10,000
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Coupon Rate Time until Maturity Current Market Rate
a. 12% 15 years 10%
b. 7 5 12
c. 9 25 6
d. 14 30 9
e. 5 6 8

SOLUTION: PB = PMT [PVFAk,n] + FV [PVFk,n]

a. PB = $60 [PVFA5,30] + $1,000 [PVF5,30] = $60 (15.3725) + $1,000 (.2314) = $1,153.75

b. PB = $35 [PVFA6,10] + $1,000 [PVF6,10] = $35 (7.3601) + $1,000 (.5584) = $816.00

c. PB = $45 [PVFA3,50] + $1,000 [PVF3,50] = $45 (25.7298) + $1,000 (.2281) = $1,385.94

d. PB = $70 [PVFA4.5,60] + $1,000 [PVF4.5,60] = $70 (20.638) + $1,000 (.0713) = $1,515.96

7. What is the current yield on each of the bonds in the previous problem?

SOLUTION:

a. $120.00/$1,153.72 = .104 = 10.4%
b. $70.00/$816.00 = .086 = 8.6%
c. $90.00/$1,385.95 = .065 = 6.5%
d. $140.00/$1,515.95 = .092 = 9.2%
e. $50.00/$859.23 = .058 = 5.8%

8. The stock of Sedly Inc. is expected to pay the following dividends.

Year 1 2 3 4
Dividend $2.25 $3.50 $1.75 $2.00

At the end of the fourth year its value is expected to be $37.50. What should Sedly sell for today if the return on stocks of similar risk is 12%?

SOLUTION: Cash Flow PVF12,n PV

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