For Questions 18 and 19, use the following information.

On March 28, 2008, Toyota Motor Credit Corp. (TMCC) issued new securities for sale to the public. Under the terms, TMCC promised to repay the owners of the securities $100,000 per share in 2038, 30 years from the offering date, and no interim payment is available between the issuance and the maturity of the securities. Investors paid TMCC $24,099 for each share of these securities.

Question 18 [5 pts]

Suppose the required rate of return for the TMCCs securities remains unchanged until the maturity. If you wanted to buy a share of the securities on March 28, 2028, 20 years from the issuance, what would the price of the securities be?

Answer (show the steps/calculation toward your answer):

Question 19 [5 pts]

Suppose that when TMCC offered the security in 2008, the U.S. Treasury had offered an essentially identical security. That is, the U.S. Treasury promised to repay $100,000 per share in 30 years from the offering date (no interim payment). Note that the U.S. Treasury securities (T-bill and treasury bonds) are considered riskless, guaranteed by the government, whereas TMCC securities are not. Which of the following is correct? Choose only one.

1. When issued, the price of the Treasury security would be lower than that of TMCC security because the required rate of return for the U.S. Treasury should be higher than TMCC.
2. When issued, the price of the Treasury security would be lower than that of TMCC security because the required rate of return for the U.S. Treasury should be lower than TMCC.
3. When issued, the price of the Treasury security would be higher than that of TMCC security because the required rate of return for the U.S. Treasury should be higher than TMCC.
4. When issued, the price of the Treasury security would be higher than that of TMCC security because the required rate of return for the U.S. Treasury should be lower than TMCC.
5. NONE of the above

Answer:

Question 20 [5 pts]

Consider a project that requires an investment cost of $10 million today. The project is expected to generate a cash flow $12 million in one year. Assume that a discount rate of 10% applies to all cash flows concerned with the firm.

1. Suppose the firm has $10 million in hand. How much is the project worth, net of the cost, in terms of the present value today? Provide the answer in $ million, rounded to 4 decimal places.

Answer:

2. Suppose the firm has no cash in hand. The firm instead can issue a financial claim priced $10 million today that promises to pay investors $11 million in one year. How much is the project worth, net of the cost, in terms of the present value today (in $ million, in 4 decimal places)?

Answer: