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Problem 1. Amortizing Bond

Assume that a bond makes 30 equal annual payments of$1,000starting one year from today.

(This security is sometimes referred to as an amortizing bond.)

If the discount rate is3.5%per annum, what is the current price of the bond?

(Hint: Recognize that this cash flow stream is an annuity and that the price of an asset is the present value of its future cash flows.)

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

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point 2.

Problem 2. Coupon Bond

Assume that a bond makes 10 equal annual payments of$1,000starting one year from today.

The bond will make an additional payment of$100,000at the end of the last year, year 10.

(This security is sometimes referred to as a coupon bond.)

If the discount rate is3.5$%per annum, what is the current price of the bond?

(Hint: Recognize that this bond can be viewed as two cash flow streams: (1) a 10-year annuity with annual payments of$1,000, and (2) a single cash flow of$100,000arriving 10 years from today. Apply the tools you've learned to value both cash flow streams separately and then add.)

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

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point 3.

Problem 3. Paying for School

Your daughter will start college one year from today, at which time the first tuition payment of$58,000must be made. Assuming that tuition does not increase over time and that your daughter remains in school for four years, how much money do you need today in your savings account, earning5%per annum, in order to make the tuition payments over the next four years ?

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

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point 4.

Problem 4. Perpetuities

Imagine that the government decided to fund its current deficit of$431billion dollars by issuing a perpetuity offering a4%annual return. How much would the government have to pay bondholders each year in perpetuity? Express your answer in billions of dollars.

(Hint: The$431billion is just the present value of these cash flows at a discount rate of4%.)

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

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point 1.

Problem 1. After-tax Return

If you earn10%per year on your investments, but pay35%in taxes on all of your investment returns, then what is your annual after-tax return?

*Make sure to input all percentage answers as numeric values without symbols, and use four decimal places of precision. For example, if the answer is 6%, then enter 0.0600.

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point 2.

Problem 2. HELOC

A home equity line of credit (HELOC) is, loosely speaking, like a credit card for your home. You can borrow money by drawing down on the line of credit. But, because the borrowed money is for the purpose of your home, the interest is tax-deductible meaning that you can deduct the interest paid on this money from your income to reduce your taxes. If the current annual interest rate on a HELOC is3.85%and your tax rate is32%, what is the after-tax interest rate you will pay on any borrowings under the HELOC?

*Make sure to input all percentage answers as numeric values without symbols, and use four decimal places of precision. For example, if the answer is 6%, then enter 0.0600.

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point 3.Problem 3. HELOC

You are preparing to buy a car that costs$36,000.

You can pay for the car using an auto loan from the car manufacturer or using money from your home equity line of credit (HELOC). The auto loan charges2.75%interest per annum. The HELOC charges3.85%interest per annum but the interest is tax deductible. If your current tax rate is32%, which source of funds should you use?

Auto Loan

HELOC

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point 4.

Problem 4. Municipal Bonds 1

The interest on some municipal bonds is tax free, in contrast to the interest on corporate bonds. If the current annual interest rates on otherwise similar(i.e., maturity, credit risk, liquidity) municipal and corporate bonds are1.48%and1.80%, respectively, what is the implied tax rate?

*Make sure to input all percentage answers as numeric values without symbols, and use four decimal places of precision. For example, if the answer is 6%, then enter 0.0600.

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point 5.

Problem 5. Paying for School with Taxes

Your daughter will start college one year from today, at which time the first tuition payment of$58,000must be made. Assume that tuition does not increase over time and that your daughter remains in school for four years. How much money do you need today in your savings account, earning5%per annum, in order to make the tuition payments over the next four years, provided that you have to pay35%per annum in taxes on any earnings (e.g., interest on the savings)?

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

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Problem 1. Mortgage - Periodic Interest Rate

You have just purchased a home by borrowing$400,000for 30-years at a fixed APR of3.87%. The loan payments are monthly and interest is compounded monthly.

What is the periodic interest rate? (I.e., what is the monthly interest rate?)

*Make sure to input all percentage answers as numeric values without symbols, and use four decimal places of precision. For example, if the answer is 6%, then enter 0.0600.

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point 2.

Problem 2. Mortgage - Effective Annual Rate

You have just purchased a home by borrowing$400,000for 30-years at a fixed APR of3.87%. The loan payments are monthly and interest is compounded monthly.

What is the effective annual rate on the loan? (I.e., what is the interest rate once we take into account compounding?)

*Make sure to input all percentage answers as numeric values without symbols, and use four decimal places of precision. For example, if the answer is 6%, then enter 0.0600.

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point 3.

Problem 3. Mortgage - Payment

You have just purchased a home by borrowing$400,000for 30-years at a fixed APR of3.87%. What is the monthly mortgage payment?

(Hint: A mortgage is just an annuity where the borrowed amount is the present value of the annuity.

So, use the annuity formula, but solved for the cash flow in terms of the present value:

CF =PVR/k1(1+R/k)Tk)

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

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point 4.

Problem 4. Savings

You put$1,000into a savings account today that offers a5%APR with semi-annual compounding (i.e., two times per year).

How much money will you have in the account after 2 years?

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

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point 1.Problem 1. Borrowing Rates

Consider the following figure that presents three yield curves:

1.High Quality Market (HQM) for Corporate Bonds (i.e., AAA, AA, or A rated bonds)

2.AAA-rated municipal bonds

3.Treasury securities

Based on the yield curves in the figure, what is the approximate cost of borrowing for highly rated corporate borrowers over a 5-year term?

2.27%

None of the answers are correct

3.54%

1.50%

0.00%

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point 2.Problem 2. Borrowing Rates( PLEASE SEEATTACHEDIMAGE 1)

Consider the following figure that presents three yield curves:

1.High Quality Market (HQM) for Corporate Bonds (i.e., AAA, AA, or A rated bonds)

2.AAA-rated municipal bonds

3.Treasury securities

Based on the yield curves in the figure, what is the approximate cost of borrowing for highly rated corporate borrowers over a 20-year term?

0.00%

1.50%

4.66%

3.54%

None of the answers are correct

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point 3.

Problem 3. Bond Yield-to-Maturity

A one-year zero coupon bond costs$99.43today. Exactly one year from today, it will pay$100.

What is the annual yield-to-maturity of the bond? (I.e., what is the discount rate one needs to use to get the price of the bond given the future cash flow of$100in one year?)

*Make sure to input all percentage answers as numeric values without symbols, and use four decimal places of precision. For example, if the answer is 6%, then enter 0.0600.

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point 4.

Problem 4. Bond Yields

You have a treasury bond that pays$100one year from today and$1,100two years from today.

You notice that the yield-to-maturity on a one year-zero coupon treasury bond is1%and the yield-to-maturity on a two year-zero coupon treasury bond is2%. What should the price of your bond be?

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

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1.

Problem 1. GoPro - NOPAT

GoPro's earnings before interest and taxes (EBIT) was$190million.

Assuming GoPro's tax rate is35%, what is their net operating profit after taxes (NOPAT) for 2014 expressed in million of dollars?

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

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point 2.

Problem 2. GoPro - Unlevered Free Cash Flow

In 2014, GoPro spent$27.5million on capital expenditures, experienced an increase in net working capital (including cash) equal to$239million, and realized$18million in depreciation.

What is GoPro's unlevered free cash flow for 2014?

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

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point 3.Problem 3. Free Cash Flow

What does a negative value for unlevered free cash flow imply for the claimants of a firm?

The firm must raise capital from the capital markets (e.g., debt, equity), or liquidate internal assets (e.g., cash)

The firm is overinvesting

Management is doing a bad job

Shareholders have made a bad investment

Revenues are less than costs

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point 4.Problem 4. Free Cash Flow

When a firm changes its capital structure by issuing or retiring debt, for example, this change alters the firms unlevered free cash flow.

True

False

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14

1.Problem 1. ChemTech - Free Cash Flow 0

Chemtec is undertaking a project that will require an upfront investment today in net working capital, and plant and equipment (i.e., capital expenditures) of$100million and$200million, respectively. If there are no revenues or expenses expected until next year, what is the project's free cash flow today in millions of dollars?

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

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point 2.Problem 2. ChemTech - Free Cash Flow 1

Continuing from Problem 1, at the end of the first year, Chemtec is expecting sales of$250million and costs of$125million. There are no more required investments in either net working capital or plant and equipment. However, the existing plant and equipment will experience$50million of depreciation.

Assume that Chemtec's marginal tax rate on earnings is35%.

Assuming that all of these cash flow occur at the end of the first year, what is the first year's free cash flow?

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

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point 3.Problem 3. Jones - NPV

Jones Corp is evaluating a project that has the following annual free cash flows:

Period 0 1 2 Free Cash Flow 150 100 150 If the project's discount rate is12%, then what is the NPV of the project?

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

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point 4.Problem 4. Donalds - IRR

Donalds Inc. is evaluating a project that has the following annual free cash flows:

Period 0 1 Free Cash Flow 175 200 What is the projects IRR?

*Make sure to input all percentage answers as numeric values without symbols, and use four decimal places of precision. For example, if the answer is 6%, then enter 0.0600.