) You are offered an investment that will return you three $7000 payments. The
first payment will occur three years from today. The second will occur in six years
from today, the third will follow in the following year i.e. seven years from today.
If you can earn 9 percent,
i) What is the most this investment is worth today? $13408
ii) What is the future value of the cash flows?$24511
b) You have determined you can afford to pay $350 per month toward a new
convertible sports car. You see an advertisement in the paper for a bank loan at
the rate of 15% pa and you want to make monthly payments over the next 4
years.
i) How much can you borrow?$12576
c) Your company is considering an issue of preference shares. The market is
currently expecting a return of 7 percent and your company expects earnings per
share to be $10.10 and the dividend for preference shares to be $1.40.
i) What will be the issue price of a preference share? $20
d) Answer the following questions
i) What is an NIR? Nominal Interest rate
ii) What is an EAR? Effective annual rate
iii) What is the difference between NIR and EAR? Compounding
iv) If an interest rate is given as 10 percent compounded daily what do we call
this rate. NIR
e) Fantastic Growth Ltd, a high technology company, has been growing at the rate
of 20 percent per year. You believe that this growth rate will last for two more
years and then drop to 8 percent per year thereafter. Total dividends just paid
were $4 million for 8 million shares, and the required return is 15 percent.
i) What should the share price be today? $9.46