FIN322 CorporateFinance Homework Assignment I
Answer All Questionsbut my professor is picking two random to grade Show all your work(use of formula, etc.) in solving the problems. You still need toshow your work even if you use the financial calculator to get theanswers.
1. Suppose you wish toplan for your newborn’s college tuition payment. You intend to makeequal semiannual deposits into an account offering 4% compoundedsemiannually on the child’s 3rd through 13th birthdays. You expectthat tuition payments will be $50,000 semiannually by the time thechild is ready to enter college. Therefore, your goal is to makeeight semiannual withdrawals of $50,000 each starting on thechild’s 18th birthday, each withdrawal to be used for semiannualtuition. Assume the account continues to offer 4 percent per yearcompounded semiannually throughout the entire period of depositsand withdrawals. How much must each of the semiannual deposits besuch that there will be enough money accumulated in the account toexactly meet the goal? [Suggestion: Draw the cash flow diagram toaid you in solving this problem.]
2. You are planning to save for retirement over the next 40 years.To do this, you will invest $500 per month in a stock account and$2,500 semiannually in a bond account. The return of the stockaccount is expected to be 6 percent per year, and the bond accountwill pay 4 percent per year. When you retire, you will combine yourmoney into an account with a 5 percent per year return. How muchcan you withdraw each month from your account assuming a 25-yearwithdrawal period?
3. You are taking out a four-year loan of $30,000 from your bank.The interest rate is 5 percent per year, and the loan calls forequal monthly payments. How much principle is paid in the secondmonth? How much total interest is paid after five months? (Draw anamortization table to answer the questions. Use of excel is highlyencouraged.)
4. Bond J is a 4 percent coupon bond. Bond K is a 7 percent couponbond. Both bonds have 10 years to maturity, make semiannualpayments, and have a YTM of 6 percent. If interest rate (YTM)changes from 6 percent to 8 percent, what is the percentage pricechange of these bonds? What if the YTM suddenly falls from 6percent to 4 percent instead? What does this problem tell you aboutthe interest rate risk of lower-coupon bonds?
5. Rizzi Co. is growing quickly. The company just paid a $2 pershare dividend and dividends are expected to grow at a 15%, 8% and4% rate respectively for the next three years, with the growth ratefalling off to a constant 3 percent thereafter. If the requiredreturn is 10 percent, what is the current share price?
