Download 1 An investor expects the value of a $1,000 investment to triple

1 An investor expects the value of a $1,000 investment to triple within 12 years. What is the expected
annual rate of growth in the investment?
9.6% , check 1000 x 1.096^12 = 3000
2. A firm has a total debt of $1,000,000 and equity of $600,000. What is the debt/net worth ratio and
the debt-to-total assets ratio for the firm? Show your calculations.
1000000/600000 = 1.67 times . 1000000/1600000 = 62.5%
3. Briefly, explain the implications of a negatively sloped yield curve.
When ever a yield curve is sloped negatively it means that yield curve is downward moving the reason
why a yield curve slopes downwards is the decrease in interest rates.
4. What is the present value of a $100,000 investment received 10 years from today, if the annual
rate of interest is 6 percent? Show your calculations.
100000*0.558=55800
5. A bond has a principal amount of $1,000, an annual interest payment of $90, and a maturity of 20
years. What is the bond’s value or price, if comparable debt yields an interest rate of 12 percent?
yrs
Cashflows
discount rate
Present value
Interest
1-20
90
7.469
672
Redemption
20
1000
0.1036
103
Market price
775
6. A firm has preferred stock outstanding that has a $55 annual dividend, a $1,000 par value, and no
maturity. If comparable yields are 9 percent, what should be the price of the preferred stock?
Market price = 55/0.09 = 611 dollars
7. ABC stock pays a $3 annual dividend today that’s expected to grow at an annual rate of 6 percent.
If you want to earn 15 percent on your funds, what is the efficient price of this stock? Show your
calculations.
Market price = {(3*1.06)/(0.15-0.06)}=35.33
8. Why is the corporate income tax structure considered to be progressive?
The corporate income tax structured considered to be progressive because the tax rate get higher with
increase in income or we can say higher bands will be charged with higher taxes .
9. A particular product has a unit price of $3, and the firm has fixed costs of $1,500 and variable costs
of $2 per unit. What is the break-even level of output for this product? Show your calculations.
Break even level of output =1500/1 = 1500 units
Break even point in dollars = 1500*3 = 4500
10. Terry anticipates needing $1,000,000 to retire 25 years from now. To meet this goal, how much
money must he save annually, if the funds earn an interest rate of 12 percent?
He must save 1000000/133 = 7518