Stock and Rate

For the purpose of calculating the net present value of the project, an appropriate cost of capital has to be calculated at which free cash flows of the project should be discounted. Since the project will be solely financed by selling new shares, cost of equity will be used as the discount rate. Beta for the company can be assumed to be equal to average of the betas of the competitors of the company. This average beta value comes out to be 1.2. Risk free rate is 0.17% while risk premium has been estimated to be 6%. Thus by putting these values in CAPM formula, we can find the cost of equity for the company which is 7.39%.

NPV analysis uses future cash flows to estimate the value that a project could add to a firm’s shareholders. A company director or shareholders can be clearly provided the present value of a long-term project by this approach. By estimating a project’s NPV, we can see whether the project is profitable. Despite NPV analysis is only based on financial aspects and it ignore non-financial information such as brand loyalty, brand goodwill and other intangible assets, NPV analysis is still the most popular way evaluate a project by companies.

The value of a bond is found as the present value of interest payments plus

A bond with an annual coupon of $70 and originally sold at par for $1,000. The current market interest rate (yield to maturity) is 8%. This bond will sell at _______. Assuming no change in market interest rates, the bond will present the holder with capital ________ as it matures.

You can earn 5% per year compounded annually for the next 4 years, followed by 8% per year compounded quarterly for 5 years. What is the average annual compounded rate of return over the 9 year period?

22. Suppose that Hanna Nails, Inc capital structure features 45 percent equity, 55 percent debt, and that it’s before tax cost of debt is 5%, while its cost of equity is 9 percent. If the appropriate weighted average tax rate is 40 percent, What will be Hanna Nails’ WACC?

10. An investment of $1,000 today will grow to $1,100 in one year. What is the continuously compounded rate of return?

9. You want to purchase a business with the following cash flows. How much would you pay for this business today assuming you needed a 14% return to make this deal?

The bonds have 20 years to maturity, pay interest at 9.3%, have a par value of $1,000 and are currently selling for $890.

So, the 20 year corporate bond interest rate associated with the company’s rating is 3.86.

b. Generate a graph or table showing how the bond’s present value changes for semi-annually compounded interest rates between 1% and 15%.

Weights of Debt and equity are 8.3 and 91.7%. Now, plugging all the values in, we can derive company’s Weighted Average Cost of Capital.

2. The discount rate for this bond would be 0.70%. I started with an appropriate discount rate to derive my bond purchase price, since I would not purchase a bond without finding out ahead of time what a good price should be.

First we need to get the present value of the annuity for the 1,500 semiannual PMTs at year 14

The Bank’s investment portfolio as at December 31, 2010 includes a 20 year gov’t fixed rate bond, coupon 5.875% that has 17 years remaining to maturity. This bond would have been purchased at a discount which means that the yield to maturity would be more than 5.875%. On March 09, 2011 the bond had a coupon rate of 6.60% and a market price of $106.92, therefore the market value of the portfolio would have been improved. Based on a comparison of the government yield curve, there was an upward trend, which suggests that return on the portfolio would be increased upon maturity. The new gov’t instrument had a coupon rate of 6.80% as at March 09, 2011 and given the upward rising of the yield curve, it appears that a 20 year tenor would also give an increased average market yield and therefore has the potential to increase the return on the total portfolio. Whilst the security is government and the instrument is