Investment: Rate of Return and Current Share Price

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UNIVERSITY OF TEXAS AT DALLAS SCHOOL OF MANAGEMENT FIN6310: INVESTMENT MANAGEMENT SOLUTIONS TO REVIEW QUIZ PROF. ARZU OZOGUZ SPRING 2013

 Make, but state clearly, all the assumptions that you feel are necessary to answer any particular question.  To obtain partial credit, make sure you show all your work.  Please make sure you sign the Honor Pledge: I have neither given nor received any aid on this examination.________________

HELPFUL FORMULAS , , , , 1 , 1 , , 1 1 , , , , 1 1 , 1 1 1 1 1

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1. Given an interest rate of 7.3 percent per year, what is the value at date t = 7 of a perpetual stream of $2,100 annual payments that begins at date t = 15?

2100 0.073

1 1.073

17,567.03

2. You’ve just joined the investment banking firm of Dewey, Cheatum, Howe. They’ve offered you two different salary arrangements. You can have $90,000 per year for the next two years and or you can have $65,000 per year for the next two years, along with a $45,000 signing bonus today. The bonus is paid immediately, and the salary is paid at the end of each year. If the interest rate is 10%, compounded monthly, which do you prefer? 1 Option 1 90,000 1.1047 Option 2 45,000 65,000 1.1047 65,000 1.1047 157,102.4 90,000 1.1047 155,218.6 0.10 12 1 10.47%

3. Hughes Co. is growing quickly. Dividends are expected to grow at a 25 percent rate for the next three years, with the growth rate falling off to a constant 7 percent after that. If the required rate of return is 12%, and the company has just paid a $2.40 dividend, what is the current share price? 1 2 3 4 3 1.12 3.75 1.12 2.40 1.25 3 3 1.25 3.75 3.75 1.25 4.69 4.69 1.07 5.02 5.02 0.12 0.07 1 1.12 80.5

4.69 1.12

4. The Morgan Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $800 every six months over the...
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