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FIN 101

Q.1 Using the values below, answer the questions that follow: (1 Mark)

Amount of annuity: $500

Interest rate: 9%

N=10 years

a) Calculate the future value of the annuity, assuming that it is

(1) An ordinary annuity.

(2) An annuity due.

b) Compare your findings in parts a(1) and a(2). All else being identical, which type of annuityordinary or annuity dueis preferable as an investment? Explain why.

Q.2 ABC company is issuing eight-year bonds with a coupon rate of 6.5 percent and semiannual coupon payments. If the current market rate for similar bonds is 8 percent, what will be the bond price? If the company wants to raise $1.25 million, how many bonds does the firm have to sell? (1 Mark)

Q3. You are interested in purchasing the common stock of Inch, Inc., which is currently priced at $ 40. The company is expected to pay a dividend of $3 next year and to grow at a constant rate of 8 percent.

a. What should the market value of the stock be if the required rate of return is 15.75 percent? (0.5 Mark)

b. Is this a good buy? Why or why not? (0.5 Mark)

Q4. Raneem owns shares in HP Inc. Currently, the market price of the stock is $36.34. Management expects dividends to grow at a constant rate of 6 percent for the foreseeable future. Its last dividend was $3.25. Raneems required rate of return for such stocks is 16 percent. She wants to find out whether she should sell her shares or add to her holdings.

a. What is the value of this stock? (1 Mark)

b. Based on your answer above, should Raneem buy additional shares in HP inc.? Why or why not? (1 Mark)