Exercise series - investment

Exercise series 2

Question 1
You are valuing an investment that will pay you $27,000 per year for the first five years, $35,000 per year for the next five years, and $48,000 per year the following five years (all payments are at the end of each year). If the appropriate annual discount rate is 10%, what is the value of the investment to you today?
Question 2
The 10-year coupon bond has a coupon rate of 8%, yield to maturity is 10%. The face value is $1000.
Without computation, compare the price of this bond with par value (face value). Give your rationale to support your ideas.
Compute the price of the bond right after the third interest payment is paid, given that coupon rate and yield to maturity do not change.

Question 3
Eisenstein Technologies has just developed a solar panel capable of generating 200% more electricity than any solar panel currently on the market. As the result, RT is expected to experience a 35% annual growth rate for the next 3 years. By the end of 3 years, other firms will have developed comparable technology and RT's growth rate will slow to 5% per year indefinitely. Stockholders require a return of 12% on RT's stock. Last year, RT paid a dividend of $1.75 per share. Calculate the current value of RT's stock.

Question 4
Megastars Corporation (MC) has the following information:
Total Asset Turnover 2.0
Return on assets (ROA) 4%
Return on equity (ROE) 6%
What is (MC)'s net profit margin and debt ratio?

Mick's Tour Service has asked you to help piece together financial information on the firm for the most current year. Managers give you the following information:
Sales = $4.8 million, Total Debt = $1.5 million, Debt Ratio = 40%, ROE = 18%.
Using this information, calculate Mick's return on asset (ROA).

Question 5
Assume you own a portfolio consisting of the following stocks:
Stock
Percentage of Portfolio
Beta (β)
Expected Return
BAC
20%
1.00
16%
FCX
30%
0.85
14%
TVIX
15%
1.20
20%
GE
25%
0.60
12%
PFE
10%
1.60
24%

Determine the expected return on your portfolio.
Determine the portfolio beta (βP).

Question 6
GMD Company has issued the preferred stocks, bonds, and common stocks.
For the preferred stock, it currently trades for $50 per share and pays a $3 annual dividend. Flotation costs are equal to 3% of the gross proceeds.
For the bonds, the face value is $1,000; a 10% coupon rate, 25 years remaining until maturity, and a current market value of $1,214.82. It pays interest semi-annually. The tax rate is 40%.
For the common stocks, a company's beta is 1.4, the market risk is 4.5%, and the risk free rate is 4%.
The target capital structure of company is 25% of debt, 10% of preferred stock, and 65% common equity. What is this firm's WACC?

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