Corporation Finance Midterm

Dr. H.Friedman

Review for Midterm--Corporation Finance

(1) You deposit $10,000 in a bank paying 16% interest. How much will you have at the end of 5 years if interest is compounded (a) annually? [$21,003](b)semi-annually?[$21,589] (c) quarterly? [$21,911] (d) monthly? [$22,138] (e)daily? [$22,252] (f)continuously?[$22,255].

(2) If GDP grows at 6% annually, how many years will it take for GDP to double? [11.9]To triple? [18.9] To Quadruple? [23.8] To Quintuple? [27.6].

(3) You would like $100,000 in ten years and the interest rate is 10%. (a) How much would you have to set aside today to have the $100,000? [$38,550]. (b) How much should you set aside annually? [$6,274.55].

(4) A firm wishes to retire $50,000,000 worth of bonds in 20 years. How much should they set aside yearly? The interest rate is 12%. [$693,939.41].

(5) An insurance company offers you an annuity at the age of 60 of $20,000 per year for 20 years. You are 30 years old and the interest rate is 6%. Should you buy this annuity if: (a) the asking price for the annuity is $2,000 per year (starting at the end of the year) for 30 years? [Yes. PV of the annuity is $39,938 and PV of your cost is $27,530]. (b)The asking price for the annuity is $4,000 per year. [No. PV of the cost is now $55,060].

(6) What price should you pay for a GM bond with five years to maturity and an 8% coupon with interest paid semiannually, if the interest rate is: (a) 6%? [$1085.31] (b) 8%? [$1,000] (c) 10%? [$922.77]

(7) Find the implicit interest rates (i.e., the cost of capital) of the following:(a) You borrow $1,000 and must repay $1,643 at the end of 3 years [18%](b) You borrow $10,000 and must repay $25,940 at the end of 10 years [10%] (c) You borrow $39,930 and must repay $10,000 per year for 5 years [8%](d) You borrow $6,210 and must repay $1,000 per year for 8 years [6%]

(8) How much should you be willing to pay for IBM preferred stock which you expect to pay out a $5 dividend forever (perpetuity). (a) You desire a 6% return? [$83.33]. (b) You desire a 10% return [$50].

(9) How much should you be willing to pay for a stock that you expect will pay a $7 dividend in a year from now, an $8 dividend two years from now, and a $9 dividend three years from now? You expect to sell the stock for $40 in three years (after you receive the third dividend) and desire an 8% return. [$52.24]

(10) You just purchased a TWA bond with an 11 % coupon and 12 years to maturity with interest paid semi-annually. You paid $738 for the bond. What is the yield to maturity and current yield? [16%, 14.9%]

Some terms that you should know:
Money market, capital market, investment banker, discount rate, prime rate, primary market, IPO (initial public offering), private placement, secondary market, auction market, dealer market, NASDAQ, term insurance, whole life insurance, deferred annuity, Treasury bill, GO municipal bond, revenue bond,mortgage bond, debenture bond, subordinated debenture bone, convertible bond, junk bond, zero coupon bond, commercial paper, bankers' acceptances, common stock, preferred stock, cumulative preferred stock, warrants, put option, call option, strike price, mutual fund, closed-end fund, sole proprietorship, general partnership, limited partnership, agency relationship, direct agency costs, indirect agency costs, proxy fight, profitability ratios(p/e ratio, e.p.s., return on assets, payout ratio), short-term liquidity ratios (current ratio, net working capital, quick ratio), long-term solvency ratios (debt-equity ratio, times interest earned interest coverage ratio), efficiency or turnover ratios (inventory turnover ratios, net sales/net working capital, sales/total assets).

E-mail: x.friedman@worldnet.att.net