Download Problems: Round your final answers to two decimal places. 1. Ten

Problems: Round your final answers to two decimal places.
1. Ten years ago, Kronan Corporation earned $0.50 per share. Its earnings this year were
$2.20. What was the growth rate in earnings per share (EPS) over the 10-year period?
2. You want to purchase a motorcycle 4 years from now, and you plan to save $3,500 per
year, beginning immediately. You will make 4 deposits in an account that pays 5.7%
interest. Under these assumptions, how much will you have 4 years from today?
3. Geraldine was injured in a car accident, and the insurance company has offered her the
choice of $25,000 per year for 15 years, with the first payment being made today, or a lump
sum. If a fair return is 7.5%, how large must the lump sum be to leave her as well off
financially as with the annuity?
4. Your aunt has $500,000 invested at 5.5%, and she now wants to retire. She wants to
withdraw $45,000 at the beginning of each year, beginning immediately. When she makes
her last withdrawal (at the beginning of a year), she also wants to have enough left in the
account so that you can make a final withdrawal of $50,000 at the end of that year (her last
withdrawal is at the beginning of the year, your withdrawal is at the end of that same year).
What is the maximum number of $45,000 withdrawals that she can make and still have
enough in the account so that you can make a $50,000 withdrawal at the end of the year of
her last withdrawal? (Hint: If your solution for N is not an integer, round down to the nearest
whole number.)
5. At a rate of 6.5%, what is the future value of the following cash flow stream?
6. Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but
you must make monthly payments, which amounts to monthly compounding. What is the
effective annual rate?
7. You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to
amortize the loan with 7 equal end-of-year payments. How much interest would you be
paying in Year 2?
8. Curtis Corporation's noncallable bonds currently sell for $1,165. They have a 15-year
maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to
maturity?
9. Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par
value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding.
What should be the bond's price?
10. Harris Co.'s bonds currently sell for $1,150. They have a 6.75% annual coupon rate and a
15-year maturity, and are callable in 6 years at $1,067.50. Assume that no costs other than
the call premium would be incurred to call and refund the bonds, and also assume that the
yield curve is horizontal, with rates expected to remain at current levels into the future.
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Under these conditions, what rate of return should an investor expect to earn if he or she
purchases these bonds, the YTC or the YTM?
11. What is the value of a 15-year, zero-coupon bond with a maturity value of $1,000 and a
semiannual-pay yield of 7.00%?
12. 5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk
premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?
13. Ivan Knobel holds a well-diversified portfolio that has an expected return of 11.0% and a
beta of 1.20. He is in the process of buying 1,000 shares of Syngine Corp at $10 a share
and adding it to his portfolio. Syngine has an expected return of 13.0% and a beta of 1.50.
The total value of Ivan's current portfolio is $90,000. What will the expected return and beta
on the portfolio be after the purchase of the Syngine stock?
14. Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in
equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?
15. The Jameson Company just paid a dividend of $0.75 per share, and that dividend is
expected to grow at a constant rate of 5.50% per year in the future. The company's beta is
1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What should be
Jameson's current stock price, P0?
16. If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected
capital gains yield for the coming year?
17. Blake Building Supplies' last dividend was $1.75. Its dividend growth rate is expected to be
constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6%
forever. Its required return (rs) is 12%. What is the best estimate of the current stock price?
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