Question

3. Tricky Traps manufactures an innovative mouse trap. Sales this year are $650,000. The company expects its sales to go up to $900,000 in six years. What is the expected annual average growth rate in sales for this company? (Rounded to the nearest percent).

1. 9%
2. 8%    
3. 7%
4. 6%
5. None of the above

4. If you require a 12% rate of return, how much would you pay now for a bond with a face value of $6,000, pays $160 interest each year and matures in 10 years' time? (Round your answer to the nearest $10).

1. $2,840
2. $2,850
3. $2,860
4. $2,870
5. None of the above

5. Eclipse Textile Company Ltd generated an EPS this year of $4.30 and paid a dividendof $1.65 per share. Eclipse Textile Company has recently been able to generate a return of 13.50% p.a. on its (book) equity base. If these numbers are assumed to be fairly stable, what will be Eclipse Textile Company's expected future growth rate?

1. 9.25%
2. 8.32%    
3. 7.32%
4. 7.58%
5. None of the above   

** Please show the all mathematical steps and the Financial Calculator step if possible, Thanks.

Answer 1

Sales this year = $650,000

Sales in 6 years = $900,000

Let the annual average growth rate be x

650,000(1+x)⁶ = 900,000

X = 5.57%

i.e. 6%

Amount paid for the bond will be equal to the present value of future coupon payments and the redemption amount

= 160*PVAF(12%, 10 years) + 6,000*PVF(12%, 10 years)

= 160*5.65022 +6,000*0.32197

= $2,835.85

i.e. $2,840

Growth rate = Return on Equity*Retention ratio

Retention Ratio = (4.30-1.65)/4.30 = 61.63%

Hence, growth rate = 13.50%*61.63%

= 8.32%