8. Ali is running a hot Internet company. Analysts predict that its earnings will grow at 30% per year for the next five years. After that, as competition increases, earnings growth is expected to slow to 2% per year and continue at that level forever. His company has just announced earnings of $1,000,000. What is the present value of all future earnings if the interest rate is 8%? (Assume all cash flows occur at the end of the year.) (Ref: BMA, 13/e, Ch 2) Answer:

9. Muneera has been asked to calculate the share price of Gamma Industries. She did some research and find out that Gamma Industries has a target debt-equity ratio of 0.5. Gamma has a 60% payout ratio, a 6.75% return on equity (ROE), and recently paid a dividend of $2.00 per share. Analysts estimate Gammas stock to be 20% riskier than the market portfolio. Assume that T-bills yield 5% and the market risk premium (MRP) is 7%. (Ref: BMA, 13/e, Ch 4,7&8) Answer:

10. Hameeda Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. According to the dividend discount model, what is the value of a share of Hameeda stock if the firms equity cost of capital is 8%? (Ref: BMA, 13/e, Ch 4) Answer: 11. Huda Industries issued 25-year, 11% coupon bonds 5 years ago, at par. Two years ago, you purchased one of their bonds when it was yielding 6%. Today the yield-to-maturity (YTM) on these bonds is 14%. What is your Capital gains / (losses) yield if the annual inflation rate was 2.5% over the past two years, and you sell your bond today? (Ref: BMA, 13/e, Ch 3) Answer: 12. Bond P is a premium bond with a 13% coupon. Bond D is an 8% coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 10%, and have 20 years to maturity. What is the current yield for bond P? For Bond D? If interest rates remain unchanged, what is the expected capital gains yield over the next year for bond P? For Bond D? Explain your answers and the interrelationship among the various types of yields. (Ref: BMA, 13/e, Ch 3) Answer:

13. Azzam Corporation expects to pay a $3.00 per share dividend on its common stock at the end of the year (D1 = $3.00). The dividend is expected to grow 25 percent a year until t = 3, after which time the dividend is expected to grow at a constant rate of 5 percent a year. The stocks beta is 1.2, the risk-free rate of interest is 6 percent, and the rate of return on the market is 11 percent. What is the companys current stock price? (Ref: BMA, 13/e, Ch 4,7&8) a. $29.89 b. $30.64 c. $37.29 d. $53.69 e. $59.05 Answer:

14. You are thinking of purchasing a house. The house costs $350,000. You have $50,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The bank is offering a 30-year mortgage that requires annual payments and has an interest rate of 7% per year. What will your annual payment be if you sign up for this mortgage? (Ref: BMA, 13/e, Ch 2) Answer:

15. Rana Inc. is evaluating three capital projects. The net present values (NPV) for the projects are as follows: The firm should A) accept Projects 1 and 2 and reject Project 3. B) accept Projects 1 and 3 and reject Project 2. C) accept Project 1 and reject Projects 2 and 3. D) reject all projects. (Ref: BMA, 13/e, Ch 2&5) Answer:

16. Abdulaziz has just arranged a $15,000 loan from your bank at an annual rate of 10%. The loan calls for annual payments of $1,000 over the next 14 years, and a final payment at the end of year 15. How big will the final payment (balloon) be? (Ref: BMA, 13/e, Ch 2) Answer:

17. Yusuf is considering installing new energy-efficient lighting in his firms warehouse. The installation will cost $300,000, and he estimates total savings of $75,000 per year. The lights will depreciate evenly over five years, at which point they must be replaced. The cost of capital is 7% per year. What do the NPV and EVA rules indicate whether Yusuf should install the lights? (Ref: BMA, 13/e, Ch 2, 5, and 12) Answer: