BUS 361
Homework
Kirk Drennan
Problem 1 (4 points)
You are buying your first house for $220,000, and are paying $30,000 as a down payment. You have
arranged to finance the remaining $190,000 30-year mortgage with a 7% nominal interest rate and
monthly payments. What are the equal monthly payments you must make?
Payment=$1,264.07
Problem 2(3 points)
Walker Industries has a bond outstanding with 12 years to maturity, a 9% coupon paid
semiannually, and a $1,000 par value. The bond has a 7% nominal yield to maturity, but it can be
called in 3 years at a price of $1,045. What is the bond’s nominal yield to call?’
Answer 4.62% Nominal Yield to Call
Problem 3 (3 points)
A stock just paid a $1.00 dividend (D0 = 1.00). The dividend is expected to grow 25% a year for the next four
years, and at a constant rate of 5% a year, thereafter. If the stock’s required return is 12%, what is its price
today?
D1=1*1.25=1.25 D2=1.25*1.25=1.56 D3=1.56*1.25=1.95 D4=1.95*1.25=2.44 D5=2.44*1.05=2.562
P4= D5/rs-gn=2.562/.12-.05=2.562/.07=36.6
P0=1.25/(1.12)^1+1.56/(1.12)^2+1.95/(1.12)^3+2.44/(1.12)^4+36.6/(1.12)^5=$26.07
Problem 4 (4 points)
Niendorf Corporation's stock has a required return of 13.00%, the risk-free rate is 7.00%,
and the market risk premium is 4.00%. Now suppose there is a shift in investor risk
aversion, and the market risk premium increases by 2.00%. What is Niendorf's new
required return?
ri=rRF+(rM-rRF)bi
13%=7%+4%*bi 13%-7%=4%*bi
6%=4%*bi 6%/4%=bi 1.5=bi
BUS 361
Homework
Kirk Drennan
ri=7%+6%*1.5= 16% new required return
Problem 5 (5 points)
Clark Communications has a capital structure that consists of 70% common stock and 30% long-term
debt. In order to calculate Clark’s WACC, an analyst has accumulated the following information:






The company currently has 15-year, 8% annual coupon bonds that have a face value of $1,000
and sell for $1,075.
The risk-free rate is 5%.
The market risk premium is 4%.
The beta on Clark’s common stock is 1.1.
The company’s retained earnings are sufficient so that they do not have to issue any new
common stock to fund capital projects.
The company’s tax rate is 38%.
Given this information, what is Clark’s WACC?
Rs=rRF+(rm-rRF)bi=.05+(.04*1.1)=.094
WACC=wdrd(1-T)+wcrs=.3*(.0717*(1-.38))+.7*.094=7.91%
Problem 6 (4 points)
Rockmont Recreation Inc. is considering a project that has the following cash flow and WACC data.
What is the project's MIRR? What is the project’s IRR?
WACC = 10%
Year:
Cash flows:
0
-$900
MIRR=14% IRR=16.7%
1
2
3
$300
$320
$340
4
$360
BUS 361
Homework
Kirk Drennan
Problem 7 (7 points)
Kids' Place is considering a new investment whose data are shown below. The equipment that
would be used has a 3-year tax life, would be depreciated on a straight line basis over the project's
3-year life, would have zero salvage value, and would require some new working capital that would
be recovered at the end of the project's life. Revenues and other operating costs are expected to
be constant over the project's 3-year life. What is the project's NPV? What is the project’s IRR? Is
the projected accepted based on the NPV?
WACC 10%
Net equipment cost (depreciable basis)
$65,000
Required new working capital
$10,000
Straight line depreciation rate
33.33%
Sales revenues
$70,000
Operating costs excluding depreciation
$25,000
Tax rate
35%
NPV=15088.33 IRR= 22% Yes the project should be accepted based on the NPV it shows a
profit of $15,088.33 or 20% of invested funds.