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?

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

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?

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