Problem #1: Time Value of Money (3 point)

When compounded daily over a 365-day year, assume the effective annual rate is 7.57226852%. What is the nominal rate per day that you would use to discount a future value a year from today to its present value, assuming 365 days in a year?

YOUR ANSWER: Rate/pd. = _________%

Problem #2: Bond Valuation (3 points)

Today you are willing to pay $968.683 for a 7% coupon bond issued by Baker, Inc. Its next payment to you will be in six months, and it pays interest every six months. The bonds are then callable at 104. If your NOMINAL yield to first call date is 7.5%, how many years of call protection do you have left until the bonds may be called?

Perspective: Borrower/USER _____ Lender/$UPPLIER _____

Nper = ________________

Rate/pd. = _____________

PV = __________________

PMT = ________________

FV = __________________

_________________________________________

YOUR ANSWER: ______________ years

Problem #3: Preferred Stock Valuation/Finite Maturity Annuity (3 points)

Allens Inc. issued preferred stock that pays a fixed quarterly dividend of $2. It is callable 20 years from yesterday at 6% above its $100 par value. If you require a nominal annual yield to first call date of 7.19%, on this security how much are you willing to pay for each share today?

Perspective: Borrower/USER _____ Lender/$UPPLIER _____

Nper = ________________

Rate/pd. = _____________

PV = __________________

PMT = ________________

FV = __________________

_________________________________________

YOUR ANSWER: $ ______________

Problem #4: Common Stock Valuation Constant-growth Perpetuity; DGM (3 points)

Lancer, Inc. has a marginal cost of existing equity capital of 12% (= investors required rate of return). Its quarterly per share dividend this year of 46.729 cents is expected to grow next year, and every year thereafter by 7%. What should be the market price per share?

YOUR ANSWER: $ ______________

Problem #5: CAPM and Stock Valuation in an Efficient Market (3points)

Deacon Company stock is trading today @ $40/share. NEXT year it will pay a quarterly dividend of 30 cents/share, which is expected to grow every year thereafter at an annual rate of 4.5%. If the market is efficient, and what is todays risk-free annual return on treasuries if the expected return on S & P 500 stocks = 9% and Deacon companys beta is 0.8 (its measure of non-diversifiable, systematic risk.?

YOUR ANSWER: ______________ %

Problem #6: Weighted Average Cost of Capital - WACC (3 points)

You are the CFO of Spicer, Inc. You now have outstanding 200,000 shares of perpetual preferred stock, for which you pay a quarterly dividend per share of $0.625. Your preferred stock is now trading at its par value of $25 per share. The market value of your common stock is $25,000,000, and its cost of equity capital is 12%. The market value of your outstanding debt (in bonds) = $20,000,000. Assume your company pays a 37.4567768% combined federal and state corporate tax rate, and that your weighted average cost of capital (WACC) today is 9.4%. All of your 10.5% coupon, semi-annual bonds are due to mature 20 years from yesterday, what is the price (PV) at which they are trading today?

Type of Security		Market Value		Weight	x	Cost of Capital % =		Subtotal
Bonds					x	%	=	%
Preferred stock					x	%	=	%
Common stock					x	%	=	%
TOTALS				1.00		WACC =		%

Problem #6 (continued) Perspective: Borrower/USER _____ Lender/$UPPLIER _____

Nper = ________________

Rate/pd. = _____________

PV = __________________

PMT = ________________

FV = __________________

_________________________________________

YOUR ANSWER: $______________