Question

SHOW ALL WORK. Preferred if you showed how to do it on both financial calculator and by hand.

1. A zero-coupon bond has a face value of $21,000 and a maturity of 8 years. Similar bonds have an interest rate of 5% per year. What is the price of this bond?

A. $2625

B. $14214

C $20870

D $8400

2. At the beginning of the year, an analyst forecasts that the earnings of Gyronetics Corp. will be $120 per share this year. Due to increased demand for drones, Gyronetics’ main product, earnings are expected to grow at a fast pace forever, at 16% per year. However, due to the riskiness of the business, the analyst believes the appropriate discount rate for the company must also be high, equal to 35%. Gyronetics maintains a constant payout ratio of 3% per year. In the analyst’s opinion, what should Gyronetics’ stock price be?

A. $10.29

B. $631.58

C. $22.50

D. $18.95

3. You have recently been hired at a company, and as part of the compensation package, they offer you a choice to receive a 5-year bonus via either of the following two options. You can receive 10 semiannual payments of $20,000 for the next 5 years, or can receive a single payment now. You look at interest rates prevailing in the markets, and decide that the appropriate rate for you is a rate quoted as 8% APR. Which of the following would be a single payment amount that would make you indifferent between the two options?

A. $162,218

B. $79,854

C. $134,202

D. $89,036

PROBLEMS 4 and 5 ARE CONNECTED.

4. As a venture capitalist, you are considering investing in a startup company called Xevo. Xevo, like most startups, is not expected to generate profits in the near future. After careful analysis, you and your colleagues determine that Xevo will start generating profits of $400,000 at the end of the 6 th year. Thereafter, it will grow at 11% per year forever. Using a discount rate of 18%, and assuming you will be acquiring 50% of the company, what is the amount your venture capital firm would be willing to invest?

A. $2,857,143

B.$1,248,883

C. $1,695,575

D. $1,058,376

5. . Xevo is hot in the Valley, and there are other venture capitalists bidding for the 50% share of the company. Another venture capitalist, a long lost friend with whom you once took Corporate Finance together at OSU, says that it’s more likely that Xevo will be able to generate $100,000 in profits at the end of each year for the first 5 years. She agrees with you on Xevo’s prospects after that as well as on the discount rate. What’s her price tag for the 50% share in Xevo?

A. $1,214,735

B. $1,405,242

C. $1,561,600

D. $2,857,143

Answer 1