1. B Corporation has $1000 par value bonds with 9 years left to maturity, a stated annual coupon rate of 6.5 percent (with annual interest payments).

What are these bonds worth today if the required market rate of return is 9 percent? _________

What are these bonds worth today if the required market rate of return is 7.5 percent? __________

What are these bonds worth today if the required market rate of return is 4 percent? __________

What are the relationship between the coupon rate, changes in the market rate, and the value of these bonds?

2. D Corporation has three bonds outstanding. All three have a coupon rate of 4 percent and a $1000 par value. The first bond has one year left to maturity. The second bond has 4 years left to maturity. The last bond has 8 years left to maturity. Assume for simplicity that the market rate for all three bonds is now 8 percent and these bonds pay annual interest payments.

What is the value for the first bond with one year left to maturity? ___________

What is the value for the second bond with four years left to maturity? ______________

What is the value for the first bond with eight years left to maturity? ___________

Assuming the same stated interest rate, in an environment of increasing interest rates which bonds will decrease in value the most -- the one with a longer-term (duration/maturity) or shorter-term (duration/maturity)?

3. G Corporation has a bond outstanding. It has a coupon rate of 11 percent and a $1000 par value. The bond has 10 years left to maturity (with annual interest payments). The bond is selling for $878. The current yield (not yield to maturity) on this bond is ___________

4. H Corporation has a bond outstanding with annual interest payments. It has a coupon rate of 6 percent and a $1000 par value. The bond has 5 years left to maturity but could be called after three years for $1000 plus a call premium of $30. The bond is selling for $920. The yield to call on this bond is _________

5. E Corporation has preferred stock outstanding that pays a $1.82 dividend. This is typically preferred stock in that the dividend is not expected to change for the life of the stock. Based on the risk of E Corporation, you think it is reasonable to expect a return of 10 percent. The value of this preferred stock is ______________

6. F Corporation has the policy to grow the company’s cash flows and consequently the dividend by 2.7 percent each year. In addition, F Corp is in an industry where risk is relatively low. Because of this low risk, a 7 percent return is reasonable as a required return. Assuming that F Corp will live up to these projections forever and expects to pay a $1.64 dividend per share at the end of the coming year. Using the formula in the book, a ballpark estimate of the value of this common stock is _____?

7. G Corporation is considering acquiring a newer, more modern machine. The machine, which requires an initial outlay of $2.5 million, will generate cash flows of $485,000 at the end of each year for 12 years. Investors could earn 6.4 percent elsewhere in opportunities of equal risk. The net present value of this project is ___________.

8. H Corporation is considering a training program that costs $800,000. Anticipated benefits are $96,000 in the first year, $175,000 in the second year, $125,000 in the third year, and $115,000 in the fourth year. Benefits will decline 8 percent a year after the fourth year and will end after the fifteenth year. Assume these benefits are received at year-end. The effective required return is 7 percent. The net present value of this training project and is ______________.

9. A new factory requires an initial outlay of $4.85 million to be paid immediately. The factory will last for twenty additional years, after which it can be sold for a salvage value of $1,000,000. Sales will be $800,000 during the first year of operation and will grow at a rate of 6 percent a year after that. Variable costs will be 25 percent of sales and fixed costs will be $165,000 and grow at a rate of 5% per year. All costs are in cash and there are no taxes paid to the government (we will model these after chapter 8). Assume cash flows occur at year-end. At a 7 percent required return – the net present value of this project and is __________.