Essay Homework Business Policy

862 Words Sep 13th, 2012 4 Pages
Week 3 - Homework P4-1. A best-selling author decides to cash in on her latest novel by selling the rights to the book’s royalties for the next four years to an investor. Royalty payments arrive once per year, starting one year from now. In the first year the author expects $400,000 in royalties, followed by $300,000, then $100,000, and then $10,000 in the three subsequent years. If the investor purchasing the rights to royalties requires a return of 7 percent per year, what should the investor pay?
A4-1 P = $400,000+$300,000+$100,000+$10,000=$725,122.13 1.071 1.072 1.073 1.074 P4-12. Bennifer Jewelers recently issued 10-year bonds that make annual interest payments of $50. Suppose you purchased one of these
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a. What is the net price that FROOGLE.com will receive for their shares?
If the underwriting spread is 7%, then the net price is 0.93x$14 =$13.02
b. How much money will FROOGLE.com raise in the offering?
Raise $13.02x3.3 million
c. How much do FROOGLE.com’s investment bankers make on this transaction?
They will make ($14-$13.02)x3.3 million
P5-6. Argaiv Towers has outstanding an issue of preferred stock with a par value of $100. It pays an annual dividend equal to 8 percent of par value. If the required return on Argaiv preferred stock is 6 percent, and if Argaiv pays its next dividend in one year, what is the market price of the preferred stock today?
A-5-6 $8.00/0.06 = $133.33 P6-1. You purchase 1,000 shares of Spears Grinders Inc. stock for $45 per share. A year later, the stock pays a dividend of $1.25 per share and it sells for $49.
a. Calculate your total dollar return. 1,000x($1.25=$4) = $5,250
b. Calculate your total percentage return. ($49+$1.25+$45)/$45 = 0.1167 = 11.67%
c. Do the answers to parts (a) and (b) depend on whether you sell the stock after one year or continue to hold it? No, because the answer does not depend on whether you sell or hold the stock. P6-2. A financial adviser claims that a particular stock earned a total return of 10 percent last year. During the year the stock price rose from $30 to $32.50. What dividend did the stock pay?
A6-2 $32.50+D-$30

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