# FINANCE-Annuity A makes annual year-end payments of $976.50 for each

6. Annuity A

makes annual year-end payments of $976.50 for each of the next 10 years, while

investment B makes annual year-end payments of $600 per year forever.
Show your work for the following two questions:

a. At what interest rate would you be

indifferent between the two investments?

b. At interest rates above/below this

break-even rate, which investment would you choose and why?

7. Rob and Laura wish to buy a new home. The price is $300,000 and they

plan to put 25% down. New Rochelle Savings and Loan will lend them the

remainder at 8% per annum, compounded semi-annually for a 25-year term. The

monthly payments are to begin in one month.

a. How much will their monthly payments be?

b. Assuming they pay off the loan over the

25-year period as planned, what will be the total cost (principal + interest +

down payment) of the house?

c. What will the outstanding balance of the

loan be after 10 years, assuming they make the first 120 payments on time?

d. Suppose they want to pay off the loan in 15

years. How much extra must they pay each month to do so?

e. Show the first six months in the

amortization table for the 25-year mortgage.

9. You are

making plans for your retirement. You have just turned 30 and want to retire on

your 65th birthday. At that time, you plan to move to the Caribbean,

where you believe you can live comfortably on $200,000 per year. You also

understand that inflation can impact your enjoyment of retirement so you would

like the annual payments you receive to increase at a rate of 5% per annum.

Your first payment of $200,000 will occur at age 66. You intend to live in the

Caribbean until your 85th birthday, when you will receive your last

installment from your retirement fund, move back to Canada, and freeload off

your kids. You would also like to save enough money so that you can buy a new

car when you are 35, and pay for a big retirement party when you are 65. You

figure you will need to have $35,000 for the car and $10,000 for the party.

You estimate

that you can earn an average return of 10% per annum on any money you invest

over the next 60 years. You have just begun working and plan on saving $11,000

per year until you are 35 years old. You will make your first deposit one year

from now. To ensure that you are able to achieve your objectives, you must

first answer the following questions:

a. How

much will you have to accumulate before you retire?

b. How

much will you have to save yearly, from your 36th to your 65th

birthday, in order to accumulate the amount from part (a) and also pay for your

retirement party?

10. A bond is currently selling at 0.85 on its

par value of $1,000. This bond has a maturity of 10 years and a coupon rate of

8%, payable semi-annually. If the inflation rate is 5%, what is the real yield

on this bond?

11. The

bonds of Microhard, Inc. carry a 12% annual coupon, have a $1,000 face value,

and mature in 4 years. Bonds of equivalent risk yield 10%. Microhard is having cash flow problems and has asked its

bondholders to accept the following deal:

The firm would like to make the next three coupon

payments at half the scheduled amount, and make the final coupon payment be

$300. If this plan is implemented and investors still demand a 10% return, what

will happen to the market price of the bond?

12.

J&J Enterprises wants to issue eighty 15-year, $1,000 zero-coupon bonds. If

each bond is priced to yield 9%, how much will J&J receive (ignoring

issuance costs) when the bonds are first sold?

13. McGonigal’s

Meats, Inc. currently pays no dividends. The firm plans to begin paying dividends

in 3 years (at the end of t3). The first dividend at that time will

be $1 and dividends are expected to grow at 5% per annum thereafter.

Given shareholders demand a 12% return on their

investments, what is the price of the stock today (t0)?

14. Suppose

that sales and profits of Oly Enterprises are growing at a rate of 30% per

year. At the end of 4 years (t4) the growth rate will drop to a

steady 5%. Oly recently paid a dividend of $1 per share. If the required return

is 20%, what is the value of one Oly share today (t0)?
(Assume dividends grow at the same rate as earnings after year

4.)

15. Bradley

Broadcasting expects to pay dividends of $1.12, $1.25, and $1.40 in one, two,

and three years, respectively. After that, dividends are expected to grow at a

constant rate of 5% forever (so, t4 to ∞). Stocks of similar risk

yield 12%.

a. What should the price of Bradley

Broadcasting stock be today?

b. What is growth rate of the Bradley

Broadcasting dividend during year 2?

c. How much is Bradley’s stock price expected

to increase during the first year?

d. What is the expected capital gains yield on

Bradley Broadcasting stock during year 8?