HULT INTERNATIONAL BUSINESS SCHOOL

MBA program _Module c

Corporate Finance
Assignment #1

Name: ____Black & Orange________

ID#: ______Group 4 ______________

Multiple Choices Circle the best answer ( 3 points each)

1.

Jamila wants to purchase a new car. She knows that she can afford to pay $250 per month
and that her bank will charge her 8% interest on the car loan. She intends to pay off the
car in five years. Of the following, which is the most expensive vehicle in her price range
that she could consider?
a. A Taurus selling for $11,900
b A Malibu selling for $12,320
.
c. A Civic selling for $14,670
d. A Celica selling for $17,500
The maximum she can pay is $12,352.92.

2.

DEWA Power has preferred stock that pays an annual dividend of $9.44. If the security has
no maturity, what is its value to an investor who wishes to obtain a 9 percent rate of
return?
a. $84.96
b. $104.89
c. $95.34
d. $94.40
Value = 9.44/0.09 = $104.89

3.

Determine (to the nearest dollar) the amount you would be willing to pay for a $1,000 par
value bond paying $80 interest each year and maturing in 12 years, assuming you wanted
to earn a 9 percent rate of return.
a. $929
b. $573
c. $1,316
d. $1,960

4.

If the present value of a given sum is equal to its future value, then
a. the discount rate must be very high
b. there is no inflation
c. the discount rate must be zero
d. none of the answers is correct

5.

What is the yield to maturity for a DDD zero coupon bond that matures in 14 years if the
bond is selling for $530.00?
a 5.84%
.
b 4.64%
.
c. 4.28%
d 5.49%
.

6.

What is the current value of the common stock of the LTD Co. if you know the current
dividend yield is 6.14%, the PE ratio is 16, and the annual dividend is $1.35?
a. $21.60
b. $21.99
c. $8.29
d. $98.24
Current Value = Dividend/Current Yield = 1.35/0.0614 = $21.99

7.

You purchased a piece of property for $30,000 nine years ago and sold it today for $83,190.
What was your rate of return on your investment?
a 12%

.
b 11%
.
c. 10%
d 9%
.

8.

Calculate the effective annual rate associated with a 6 percent stated quarterly rate.
a.
6%
b.
6.09%
c.
6.14%
d.
12.55%
e.
24%
EAR% = (1+

9.

Interest rate
)^M 1 = 6.14%
Number of months

Ambrin Corp. expects to receive $2,000 per year for 10 years and $3,500 per year for the
next 10 years. What is the present value of this 20 year cash flow? Use an 11% discount
rate.
A. $19,033
B. $27,870
C. $32,389
D. none of these

Present Value = $7259.22 + $11,778.46 = $19037.68

10.

Mike Carlson will receive $10,000 a year from the end of the third year to the end of the
12th year (10 payments). The discount rate is 10%. The present value today of this deferred
annuity is:
A. $61, 450
B. $42,185
C. $46,149
D. $50,757
Value at third year = $61445.67

Present Value = $50,781.54 ~ $50757

Question #1 (6 points)
You will deposit $2,000 today. It will grow for 6 years at 10% interest compounded
semiannually. You will then withdraw the funds annually over the next 4 years. The annual
interest rate is 8%. Your annual withdrawal will be:

PVa = $3591.71, N=4, R=0.08

Pmt = ?
PVa = Pmt

Pmt =

1( 1+ R )n

PVaR
n
1(1+ R)

287.3368
= $1084.41
0.26497
Question #2 (8 points)
You plan on depositing $10,000 at the end of each year for 40 years into a retirement
account that pays 5% interest. How much could you withdraw annually in equal beginning
of year amounts starting at the time you make your last deposit and continuing for a total
of 20 years, assuming balances continue to earn 5% until withdrawn?
Pmt =

FV = $1,207,997.74
PMT =

Question#3 (4 points)
Assume a friend has offered to give you $5,000 at the end of five years if you will invest in
his new business today. In considering the friend's proposal, you believe you would only
need a 10% rate of return (since it is your friend). Your friend has asked you to invest
$4,000. Would you make the investment today?

FV = $6,442.04
IRR is just 4.56%

So it is not wise to invest in this venture.

Question #4 (4 points)
As a member of East Corporation's financial staff, you must estimate the Year 1 operating
cash flow for a proposed project with the following data. What is Year 1 operating cash
flow?
Sales revenues, each year
$45,000;
Depreciation
$10,000
Operating costs other than depreciation $17,000;
Interest expense
$4,000
Tax rate
35.0%
- We deduct depreciation to calculate the tax expense.
- It is added back once the tax is calculated.
$45000 $10,000 - $17,000 = $18,000*(1-0.35) = 11,700 + 10,000 = $21,700
Year 1 operating cash flow = $21,700

Question #5 (9 points)

Ahmad has a 10-year old daughter, Miriam, who will be entering college in 8 years. Ahmad
estimates college costs to be $15,000, $17,000, $19,000 and $21,000 payable at the
beginning of each of Miriams four years in college. How much must Ahmad save each year
(assume end of year payments) for each of the next 8 years to have enough savings to pay
for Miriams education? Assume Ahmad can earn 9% on his savings.
Value of tuition fees at the beginning of the college year using Excel:

Year 1
Year 2
Year 3
Year 4

($15,000
.00)
($15,596
.33)
($15,991
.92)
($16,215
.85)
Total

=PV(0.09,0,0,150
00,1)
=PV(0.09,1,0,170
00,1)
=PV(0.09,2,0,190
00,1)
=PV(0.09,3,0,210
00,1)
($62,804.10)

FV = $62,804.10
N=8
I = 0.09
Pmt = $5,694.72
Ahmed should save $5,694.72 each year.

Question #6 (6 points)
Eight years ago, the City of Deira sold a $1,000 bond with a coupon rate of 9 percent and
20 years to maturity at a premium price of $1,125. What is the value of this bond today to
an investor who requires
a:9% rate of return?
b:10% rate of return?

Value of bond at 9% rate of return = $1000

Value of bond at 10% rate of return = $931.86

Question#7 (5 points)
Suppose you borrowed $15,000 at a rate of 9% and must repay it in 5 equal installments at
the end of each of the next 5 years. What is the outstanding balance of the loan at the end
of second year?
PV = $15,000
Rate = 0.09
N=5
PMT =
Total amount to be paid = $3856.39*5 = $19281.93
Outstanding balance = 19281.93 (2*3856.39) = $11,569.15

Question #8 (5 points)
The earnings and dividends of Dubai Computer Co. are expected to grow at an annual rate
of 12 percent over the next 2 years and then slow to a constant growth rate of 7 percent
per year. Dubai currently pays a dividend of $0.50 per share. What is the value of Dubai
stock to an investor who requires a 13 percent rate of return?
Question #9 (9 points)
Dubai Manufacturing Co. has a bond of $1000 par value outstanding. It pays interest
annually and carries an annual coupon rate of 8%. Bonds are due in 10 years. If the market
rate of return on bonds is 10%. Required:
a) what is the current price of the bond? Explain whether the bond will sell at a discount or
a premium?

The bond will sell at a discount rate because the value of the bond is 877.11 dollars.
b) Would the price of the bond be any different if interest was paid semi-annually instead of
annually? Explain?

The number of periods = 20

Payments = 40
c) Explain what would happen to the bond price 5 years from now if the market interest
rate remained the same at 10%. Explain what would be the market value of the bond at
maturity date.
FV=?
PV=$877.11
I/R = 10%
N=5
FV = $1,412.59

Question #10 (5 points)

A firm will make a cash outlay of $100,000 for a piece of equipment which has a 5 years
useful life. The firm is going to purchase an additional $8,000 of inventory for production
with the new equipment and set up a cash account with a $3,000 balance. The inventory
purchase will result in an account payable of $4,500. The firm's tax rate is 40%. What is the
net cash flow related to the working capital?
Cash Outlay = $100,000

Question #11 (9 points)

You just heard one of your colleagues saying that NPV=0 means that the project makes no
profit no loss? Do you agree with your friend? Explain. Describe how share prices should
respond to a (NPV=+) and a (NPV=-) management decisions. Consider only financial
claimants to a firm's cash flows.
NPV = 0
PV(Inflows) PV(Outflows) = 0
PV(Inflows) = PV(Outflows)
1.
No, I do not agree with my friend. NPV = 0 means that the rate of return on
the investment done in year 0 is equal to the discount rate in the case the future value is
converted in terms of the present value.
2.
The share price is affected by the value of the company and the number of
shares in the market.
a.
If there is a management decision that has a NPV=+, the share prices are
expected to respond in a positive manner. This is because the company value will increase
for the same number of shares available in the market.
b.
If there is a management decision that has a NPV=-, the share prices are
expected to respond in a negative manner. This is because the company value will
decrease for the same number of share available in the market.