You want to value a bond that the company XYZ is about to issue. Its maturity is 10 years, face value is $1,000 and coupon payments are semiannual with a coupon rate of 5%. The companys credit rating is Aa1. Youve observed that the yield-to-maturity on a 10-year government bond is currently 3.83%, and from historical data you deduced that the yield-to-maturity of Aa1 companies are normally 1.20 percentage points higher than the yield-to-maturity of government bonds (that is, credit spread is 1.20%). What is the fair price of the XYZs bond?

You observe that the stock price of the ABC corporation is currently $123. The company has never paid any dividends. However, it has just announced that is going to change its tradition and will distribute the dividend of $2 in two years. After that, it is expected to increase its annual dividend at the rate of 2% per annum in perpetuity. Given this information, what is the implied discount rate?

Suppose that projects cash flows are C0 = $115, C1 = $120, C2 = $80, C3 = $40, C4 = $130. Required rate of return is 15%. Compute NPV and IRR of this project. Should you take this project? What would be an appropriate IRR rule for this project (i.e., for which required rates of return the project should be accepted)?

Your company possesses a machine that you have purchased 5 years ago for $100,000. Its current book value is $55,000 and market value is $65,000. The annual depreciation for the old machine is $9,000, and its market salvage value in 5 years is expected to be same as its book value at that time, that is, $10,000. You are considering to exchange the old machine with a new one. The new machine will boost revenues of your company by $10,000 and cut costs by $40,000 per year for the next five years. The cost of this new machine is $250,000. You will use it for 5 years, after which its market salvage value will be $17,000. Assuming a straight-line depreciation of the new machine to zero in 5 years, will you replace the old machine? If you choose not to replace the old machine, you will use it for 5 years, after which you are going to sell it. Assume that the tax rate is 20% and required return is 10%. (Hint: compute incremental cash flows, i.e. differences between what the new machine and the old machine deliver.)