Q1:R

If the approximate discount rate is 12% per year, what is the present value of
the following expected cash flow?

Year 1 to 6 $ 0 per year

Year 7 to 10 $ 2000 per year

Year 11 to 15 $ 4300 per year

Q2:R
GAP offers a 9.5% coupon bond with annual payments. The yield to maturity
is 11.2% and the maturity date is 11 years from today. What is the market
price of this bond if the face value $1000?
PMT = 1000(.095) = 95 N=11 FV=1000 I/Y(=r) =11.2

Bond Value =

Q3:
Company B recently paid $2.5 as an annual dividend. Future dividends are
projected at $3.3 , $4.2 and $5.6 over the next 3 years, respectively. Begin 4
years from now, the dividend is expected to increase by 4 percent annually.
What is the one share of this stock worth to you if you require is 12% rate of
return?
Q4:R session 7
Ph.Inc is considering a new 5-year expansion project that requires an initial
fixed asset investment of $6 million. The fixed asset will be depreciated
straight-line to zero over its 6-years tax life. The project is estimated to
generate $5.328.000 in annual sales with cost of $2.131.200. The tax rate is
31%. What is the operating cash flow for this project? If at the end of project,
the fixed asset can be sold for $1.200.000, what is the after tax cash flow from
selling these asset?

Q5: Session 10
Consider the following information:

Standard Deviation Beta

Security 25% 1.55

C

Security 35% 0.90

D

A, Which security has more total risk?

 Security D has more total risk since it has higher standard deviation

B. Which security has more systematic risk?

 Security C has more systematic risk, since it has a higher Beta

C. Which security should have the higher expected return ? Why ?

 Security C should have a higher expected return since it has a higher Beta, and thus
higher systematic risk. (A risk premium on an asset only depends on its systematic
risk).

Q6:Session 10
The company B has $70M bank loans with an interest rate of 9.5%. The
company also have 2.3M shares of common stock outstanding. The common
stock has a Beta of 1.34 and sells for $40 a shares. The U.S.Treasury bill is
yielding 3.8% and the return on the market is 11.2%. The corporate tax rate
is 35%. What is the Company’s weighted average cost of capital?

 Re = Cost of equity = Rf + A (E(RM) – Rf )

 = 3.8% + 1.34(11.2%-3.8%)
= 0.13716

 Rd = Cost of debt = (70M×9.5% )/70M = 0.095

 E = Market value of equity = Total share outstanding × Total share
price

= 2.3M × $40 = 92M

 D = Market value of debt = 70M

=> WACC = E/(E+D) × Re + D/(E+D) × Rd × (1-t) = 92/(92+70) × 0.13716 +

70/(70+92) × 0.095 × (1-35%) = 10.46%

Phillps Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar
characteristics are yielding at 6.75 percent. The company also has 7500,000 shares of 7
percent preferred stock and 2.5 million shares of common stock outstanding. The preferred
stock selling for $53 a share. The common stock has a beta of 1.34 and sells for $42 a share.
The U.S. Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent. The
corporate tax rate is 38 percent. What is the firm's weighted average cost of capital?
Re = 0.028 + 1.34(0.112 - 0.028) = 0.14056
Rp= (0.07 x $100)/$53 = 0.13208

Debt: 80,000 x $1,000 = $80m

Preferred: 750,000 x $53 = $39.75m
Common: 2.5m x $42 = $105m
Total: $224.75m

WACC = ($105m/$224.75m)(0.14056) + ($39.75m/$224.75m)(0.13208) +

($80m/224.75m)(0.0675)(1 - 0.38) = 10.39 percent