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ASSIGNMENT INTRODUCTION
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Assignment Questions:(Marks: 15)
A company issued 10-year bonds three years ago with a coupon of 7 percent. If the current market rate is 8 percent and the bonds make
annual coupon payments, what is the current market value of one of these
bonds? what is the current market value of one of these bonds if it was a zero-coupon rate? (2.5 Marks)
ABC company is growing at a constant rate of 7 percent every year. Last week the company paid a dividend of $1.8. If dividends are expected to grow at the same rate as the firm and the required rate of return is 12 percent, what should be the stock’s price four years from now? (2.5 Marks)
XYZ company is considering developing new computer software. The cost of development will be $775,000 and management expects the net cash flow from the sale of the software to be $200,000 for each of the next six years. If the discount rate is 13 percent, what are the net present value and payback period of this project? (2.5 Marks)
A
the chemical company is considering buying a magic fan for its plant. The
magic fan is expected to work forever and help cool the machines in the
plant, reducing their maintenance costs by $6,000 per year. The cost of the fan is $50,000. The appropriate discount rate is 10 percent, and the marginal tax rate is 35 percent. Should the company buy the magic fan? (2.5Marks)
Define bond yield to maturity. Why is it important? (2.5 Marks)
Explain why preferred stock is considered to be a hybrid of equity and debt securities. (2.5 Marks)
HOW TO WORK ON THIS ASSIGNMENT ( EXAMPLE ESSAY/ DRAFT)
Financial Analysis Assignment: Bond and Stock Valuation, NPV, and Decision-making
Question 1: A company issued 10-year bonds with a coupon of 7 percent, three years ago. If the current market rate is 8 percent and the bonds make annual coupon payments, what is the current market value of one of these bonds? Also, what is the current market value of one of these bonds if it was a zero-coupon rate?
Answer: The current market value of the bond can be calculated using the present value formula. The current market value of the bond with a 7 percent coupon rate and a current market rate of 8 percent, would be less than its face value. The current market value of the bond is $986.16. If the bond was a zero-coupon rate bond, the current market value of the bond would be its face value, which is $753.87.
Question 2: ABC company is growing at a constant rate of 7 percent every year. Last week the company paid a dividend of $1.8. If dividends are expected to grow at the same rate as the firm and the required rate of return is 12 percent, what should be the stock’s price four years from now?
Answer: The stock price can be calculated using the dividend discount model. The expected stock price four years from now would be $39.90.
Question 3: XYZ company is considering developing new computer software. The cost of development will be $775,000, and management expects the net cash flow from the sale of the software to be $200,000 for each of the next six years. If the discount rate is 13 percent, what are the net present value and payback period of this project?
Answer: The net present value of the project is $93,514.59, and the payback period is 4.33 years.
Question 4: A chemical company is considering buying a magic fan for its plant. The magic fan is expected to work forever and help cool the machines in the plan, reducing their maintenance costs by $6,000 per year. The cost of the fan is $50,000. The appropriate discount rate is 10 percent, and the marginal tax rate is 35 percent. Should the company buy the magic fan?
Answer: The net present value of the magic fan project is $6,933.33, which is positive. Hence, the company should buy the magic fan.
Question 5: Define bond yield to maturity. Why is it important?
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