Part A:

1

Perpetuity problem

What is the value of a perpetuity with an annual payment of $100 and a discount rate of 6%?

2

1. Present value of single sum problem

   You are going to be given $45,000 in 7 years. Assuming an interest rate of 2.5%, what is the present value of this amount?

3 Future value of single sum problem

You put $5,000 in an investment account today which will earn 6% over the next 11 years, what is the future value?

4

1. Perpetuity problem

   What is the value of a perpetuity with an annual payment of $50 and a discount rate of 4%?

5

1. Future value of annuity problem

   You deposit $10,000 into a retirement account at the end of the next 10 years earning 9% interest, what is the future value of your retirement after 10 years?

Part B:

1

Valuation – corporate bond

A $1,000 corporate bond with 20 years to maturity pays a coupon of 7% (semi-annual) and the market required rate of return is a) 6.6% b) 13%. What is the current selling price for a) and b)?

2 A share of stock is currently selling for $31.80. If the anticipated constant growth rate for dividends is 6% and investors are seeking a 16% return, what is the dividend just paid?

3 Valuation – convertible bond

You purchased one of AAA Corp.’s 9%, 15-year convertible bonds at its $1,000 par value a year ago when the company’s common stock was selling for $25. Similar bonds without a conversion feature returned 10% at the time. The bond is convertible into stock at a price of $35. The stock is now selling for $40.

Assume no dividends.
a) You exercise the conversion feature today and immediately sold the stock you received. Calculate the total return on your investment.

b) What would your return have been if you had invested $1,000 in AAA’s stock instead of the bond?

4 Valuation – preferred stock

What is the value of a share of preferred stock that pays a $9.50 dividend, assume k is 12%.

1. Future value of annuity problem

   You deposit $10,000 into a retirement account at the end of the next 10 years earning 9% interest, what is the future value of your retirement after 10 years?

5

1. Valuation – preferred stock

   What is the value of a share of preferred stock that pays a $4.50 dividend, assume k is 10%.