Question
1. Last year, a company issued a 20-year annual coupon bond at par value with a yield to maturity of 9.00%. The current yield to
1. Last year, a company issued a 20-year annual coupon bond at par value with a yield to maturity of 9.00%. The current yield to maturity has increased to 9.30%. Investors anticipate another increase in yield to maturity over the next 12 months to 9.60%. If the investors forecast accurately, what will be the rate of return on an investment in this bond over the next year?
2. Brain Phone, Inc. has developed a new technology that will allow cell phone usage via cerebral implant. The company forecasts negative cash flows for 5 years, and then anticipates positives cash flows that are expected to grow at 4% forever. Investors require an 11% return. Below is the table of forecasted free cash flows.
Free Cash Flows (millions) | ||||||||||||||||||||||
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | |||||||||||||||||
$ | 3.85 | $ | 2.95 | $ | 2.25 | $ | 1.55 | $ | 0.85 | $ | 3.25 | |||||||||||
a. What is the present value of the horizon value of the company? (Enter your answer in millions rounded to two decimal places.)
b. What is the present value of the firms remaining free cash flows? (Enter your answer in millions rounded to two decimal places. Use a minus sign for a negative answer.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started