Given We have a stock that will pay 14 per year with the next dividend paid later today In 3 years company can retain all earnings and earn 11 over the following year Discount rate is 8 What is the present value of the stock if it continues to be a cash cow ID: 528865
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Question 1a
Given: We have a stock that will pay $14 per year with the next dividend paid later today. In 3 years, company can retain all earnings and earn 11% over the following year. Discount rate is 8%
What is the present value of the stock if it continues to be a cash cow?
PV=14 + 14/.08 =189Slide2
Question 1b
Given: We have a stock that will pay $14 per year with the next dividend paid later today. In 3 years, company can retain all earnings and earn 11% over the following year. Discount rate is 8%
Should the company retain its earnings?
Yes, because rate of return is greater than discount rate
11% > 8%
Also, NPV>0 (see 1c)Slide3
Question 1c
Given: We have a stock that will pay $14 per year with the next dividend paid later today. In 3 years, company can retain all earnings and earn 11% over the following year. Discount rate is 8%
How much does the stock’s PV change if the company retains its earnings ?
NPV=-14/1.08^3 + (14*1.11)/1.08^4 = .3087Slide4
Question 2
We have a zero coupon bond sold for $500 on March 8 2016. When sold on the date, the YTM was 2.63%. The maturity date is March 8, 2046.
If the YTM on June 8 2016 was 2.51%, what did the bond sell for on this date?
March 8 2016:
PV=Face/(1.0263)^30
500=Face/(1.0263)^30
Face=1089.43
June 8 2016:
PV=1089.43 / (1.0251)^29.75
PV=521.08 Slide5
Question 3
Machine is purchased today for $5000. First maintenance cost is $50 two years from today. That cost is paid annually and grows 4% every year. Last maintenance cost is 9 years from today. What is the EAC if EAR is 10% and machine lasts 12 years?
PV of costs=
EAC:
X= 774.02
Slide6
Question 4
Stock currently sells for $50 and pays X dividend every year starting one year from today. The stock has a beta value of 1.5. Risk free rate is 5% and the risk premium is 6%. What is X?
CAPM:
Perp:
X/.14 = 50
X= 7
Slide7
Question 5
Company gives stockholders expected rate of return of 20% if company is unlevered. company’s cost of debt is 12%. Stockholders are currently owning 25%. What fraction of the company’s value is held by bondholders?
Let X be proportion held by bondholders
.2 = .12X + .25 ( 1-X)
.13X=.05
X= .3846Slide8
Question 5
Company gives stockholders expected rate of return of 20% if company is unlevered. company’s cost of debt is 12%. Stockholders are currently owning 25%. What fraction of the company’s value is held by bondholders?
Also use M/M II
Slide9
Question 6
On July 5, 2013, Lauren borrowed 100,000. She financed the loan with equal monthly payments over 84 months, starting August 5, 2013. The SAR is 15% compounded month. On August 5, 2016, Lauren makes a balloon payment in addition to the regular payment. The loan has a .5% penalty charged on the amount of the balloon payment. What is the balloon payment?
1) Find monthly payment
2) Find remaining regular balloon payment: 84-37 payments= 47 payments left
3) Total Payment = Balloon * 1.005 = 68,614.28
Slide10
Question 7
A stock is either $80 or $105 two years from today both with 50% probability. A European call option for this stock has an exercise price of $90 two years from today. If EAR is 14%, what is the most someone will be willing to pay for the option?
PV=
Willing to pay at most 5.77