Opportunity to Make an Investment Term Paper

Excerpt from Term Paper :

Present Value

Price of bond= 0.385543*1000 +6.144567*100= $385.54.64+$614.45

Price of bond= $1,000

So, price of bond B. is $1,000 b. For market interest rate equal to 12%:

Price for bond a:

Market interest rate is equal Coupon rate is equal Face value Frequency Number of years to maturity Number of Periods Discount rate annually Discount rate per period n, periods r, per period 12%

10% $1,000 Annual 20-20-12.00% annual 12.00% 20-12.00%

Now we need to calculate PVIF and PVIFA.

For calculation of PVIFA (i, n) and PVIF I is equal to 20 periods and n=12%

PVIF= 1/(1+0.12)^20

PVIF=0. 103667

PVIFA= (1- 1/(1+.12)^20)/.12

PVIFA=7.469444

Price of bond= 0.103667*1000+7.469444*100=$851

Price of bond a = $851

Price of bond B:

Market interest rate is equal Coupon rate is equal Face value Frequency Number of years to maturity Number of Periods Discount rate annually Discount rate per period n, periods r, per period 12%

10% $1,000 Annual 10-10-12.00% annual 12.00% 10-12.00%

Now we need to calculate PVIF and PVIFA.

For calculation of PVIFA (i, n) and PVIF I is equal to 10 periods and n=12%

PVIF= 1/(1+0.12)^10

PVIF=0.321973

PVIFA= (1- 1/(1+.12)^10)/.12

PVIFA=5.650223

Price of bond= 0.321973*1000+5.650223*100=$886.99

Price of bond B = $886.99 for market interest rate equal to 8%:

Price for bond a:

Market interest rate is equal Coupon rate is equal Face value Frequency Number of years to maturity Number of Periods Discount rate annually Discount rate per period n, periods r, per period 8%

10% $1,000 Annual 20-20 8.00% annual 8.00% 20 8.00%

Now we need to calculate PVIF and PVIFA.

For calculation of PVIFA (i, n) and PVIF I is equal to 20 periods and n=8%

PVIF= 1/(1+0.08)^20

PVIF=0. 214548

PVIFA= (1- 1/(1+.08)^20)/.08

PVIFA=9.818147

Price of bond= 0. 214548*1000+9.818147*100=$1,196.36

Price of bond a = $1,196.36

Price for bond B:

Market interest rate is equal Coupon rate is equal Face value Frequency Number of years to maturity Number of Periods Discount rate annually Discount rate per period n, periods r, per period 8%

10% $1,000 Annual 10-10 8.00% annual 8.00% 10 8.00%

Now we need to calculate PVIF and PVIFA.

For calculation of PVIFA (i, n) and PVIF I is equal to 10 periods and n=12%

PVIF= 1/(1+0.08)^10

PVIF=0.463193

PVIFA= (1- 1/(1+.08)^10)/.08

PVIFA=6.710081

Price of bond= 0.463193*1000+6.710081*100=$1,134.19

Price of bond B = $1,134.19

3. Scubaland, Inc. is experiencing a period of rapid growth. Earnings and dividends per share are expected to grow at a rate of 18.00% during the next two years, 15.00% in the third year, and 6.00% thereafter. Yesterday, Scubaland paid a dividend of $1.15. If the required rate of return on the stock is 12.00%, what is the price of a share of the stock today?

As it's stated in the problem that Scubaland paid dividend of $1.15 yesterday, then we can assume that this amount is dividend for the last year. Using growth rates provided in the problem we can calculate the value of dividends which are expected to be received in future:

Year growth Dividend

1.357 = 1.15*(1+0.18)

Dividend in year 4 will be equal to $1.95

No we can calculate present value of dividends starting from the year 4.

PV (n-1)= D (n)/(r-g), where n- year #; r- rate of return on the stock; g- growth rate of the stock:

D3= 1.95/(12%-6%)=32.5

In order to evaluate present value of dividend we can make a following table:

Dividend, $

PV factor @ 12%

Calculated as:

1/(1+12%)^n, where n is year from 1st colomn present value of dividend calculated as:

Dividend* PV factor @ 12%

So we can conclude that $32,5 is present value of dividends from 4th year onwards in year 3, and according to our calculations price of share today is equal to $26,96

4. Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported cash flows of $800,000.00 and have 500,000 shares of common stock outstanding. Without new projects, both firms will continue to generate cash flows of $800,000.00 in perpetuity. Assume that the cash flows are equal to earnings (no dividends are paid). Assume both firms require a 15.00% rate of return.

a. Pacific…

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