True/False

1. A company that is guaranteed to pay dividends can have a positive value.

2. Forecasting cash flows has no significant risks.

3. Discount rate is a synonym for coupon rate.

4. Bond prices are inversely related to their time to maturity.

8. Adam Clayton wants to sell stock to raise capital.  He plans to issue a dividend of $7.00 next year and growing at a 4% rate forever.  What is the intrinsic value of this stock if the discount rate is 8%?

9. INXS Corporation, a maker of “What You Need”, just paid a dividend of $2.00.  The dividends have a constant growth rate of 10%.  The required rate of return on this firm is 16%.  What is the intrinsic value of a share of this stock?

10. Bueller, Inc. has a 30 year bond that has existed for 10 years, a coupon rate of 10%, and a required rate of 10%.  Assuming a face value of $1000, what is the intrinsic value of the bond?  What if the required rate was 6%?  What if the required rate was 14%?

11. A new 10 year bond has a coupon rate of 25%.  The bond is nine years old and has a required rate of return of 10%.  The face value is $1000.  What is the intrinsic value of the bond?

13. A potential project has the following expected cash flows.

            t              0         1          2          3          4          5

            CF       -500     150      220      -80       360      100

Assuming a discount rate of 10% please calculate Net Present Value, Payback, and Discounted Payback

Formula Sheet

PV*(1+r)^t

FV/(1+r)^t

(1+r)^t – 1 * CF

r

1 – 1/(1+r)^t  * CF

r

CF/r

D₁/(r-g)