# Investment: Rate of Return and Current Share Price

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.________________

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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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