Question

1) Your company is planning to borrow $1,000,000 on a 3-year, 8%, fully amortized, term loan. Payments for this loan are made at the end of each year, in equal installments.

a. What is the amount of each annual payment?

b. What will be the amount of the principal paid in the second yearly installment?

c. What will be the amount of interest paid in the third yearly installment?

2) A stock is not expected to pay a dividend over the next four years. Five years from now, the company anticipates that it will establish a dividend of $1.00 per share (i.e., D5 = $1.00). Once the dividend is established, the market expects that the dividend will grow at a constant rate of 5 percent per year forever. The risk-free rate is 5 percent, the company's beta is 1.2, and the stock market’s average required rate of return is 10%. The required rate of return on the company’s stock is expected to remain constant.

a) What is the company’s stock’s required return?

b) What is the company’s stock’s horizon (terminal) value?

c) What is the current company’s stock price?

3) Assume that you just won the national lottery. Your prize could be taken either in the form of $40,000 each year for the next 25 years (i.e., $1,000,000 over 25 years) or a lump sum of $500,000 paid immediately.

a. If you expect to be able to earn a return of 5% per year on your investments over the next 25 years, which alternative should you take? Why?

b. Would your decision in part a) be different if you could earn 7% per year on your investments? Why or why not?

Answer 1

I can only answer 1 question at a time, so I am answering only question 1.

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