Investment Decision Rules and Other Problems

You are saving for graduate school and want to have $50,000 in six years time. How much do you have to deposit every month if your investment account has an EAR of 9.5% and pays you interest every month?

Your best friend wants to borrow $5,000 from you and offers to pay you back $6000 in a year. If you looked for similar investments, they would provide you with a cash flow of $5795 on year from today. A one-year treasury bill currently yields 1.2%. What is the opportunity cost of capital? If you decided to borrow money from the bank to make the investment, what is the maximum interest rate you could be charged by the bank to break even on the investment?

You decide to take out a loan to buy a new factory for $100,000. The bank offers you a 9% APR loan with monthly payments. If the monthly payments are $3180 per month, what is the term of the loan?

As the bond manager of Investko Inc., you are charged with the task of selecting one of two corporate bonds. Bond A has a 10 year maturity, $1000 par value and has a coupon rate of 2% and pays interest semi-annually. It is priced similar to BBB corporate rated bond. Bond B also has a 10 year maturity, $1000 par value and has a coupon rate of 5% coupon rate and pays interest semiannually. It is priced similar to a AAA corporate rated bond. You note that 10 year maturities have the following yields: Treasuries 2.1%, AAA 3.8%, BBB 4.9%. If you expect interest rates to fall 1%, which bond should you select for the portfolio?

Inceptus Pharmaceutical is investing heavily in new drug development, and currently pays no dividends. It currently earns $0.75 and is expected to grow earnings for the next three years at a rate of 25%. After year three, it will grow earnings at a constant rate of 4%. The company will initiate its first dividend one year after the constant growth begins, when it begins a dividend payout of 50%. If the cost of capital is 14%, what is the value of Inceptus stock today? (Hint: while you could normally use D3 as the DN+1 dividend to calculate P2 (the year that constant growth starts after), there are no dividends paid until year 4 (one year after constant growth begins), so you should use D4 to calculate P3 and then discount it back to the present).

You have 4 shareholders (A, B, C and D) in a company with a total of 100,000 shares. Their holdings are as follows: A has 29000 shares, B has 32000 shares, C has 18000 shares, and D has 21000 shares. If there are 12 directors up for election to the board, how many directors can each shareholder ensure election to the board under cumulative voting? Assume all shares are voted. (I dont have enough M&Ms to demonstrate this, but you can use the formula to figure this out (#shares X (directors + 1) / shares voted).