1.

Ceebros Builders is expanding very fast and is expected to grow at a rate of 25 percent for
the next four years. The company recently paid a dividend of $3.60 but is not expected to pay
any dividends for the next three years. In Year 4, management expects to pay a $5 dividend
and thereafter to increase the dividend at a constant rate of 6 percent. The required rate of
return on such stocks is 20 percent.
a. Calculate the present value of the dividends during the fast-growth period.
b. What is the value of the stock at the end of the fast-growth period (P4)?
c. What is the value of the stock today?
d. Would today's stock value be affected by the length of time you intend to hold the stock?
2. Zweite Pharma is a fast-growing drug company. Management forecasts that in the next three
years, the company's dividend growth rates will be 30 percent, 28 percent, and 24 percent,
respectively. Last week it paid a dividend of $1.67. After three years, management expects
dividend growth to stabilize at a rate of 8 percent. The required rate of return is 14 percent.
What is the current price of the stock?
3. Rudy Sandberg wants to invest in four-year bonds that are currently priced at $868.43. These
bonds have a coupon rate of 6 percent and make semiannual coupon payments. What is the
current market yield on this bond?
4. You bought a six-year bond issued by Runaway Corp. four years ago. At that time, you paid
$974.33 for the bond. The bond pays a coupon rate of 7.375 percent, and coupon payments
are made semiannually. Currently, the bond is priced at $1,023.56. What yield can you expect
to earn on this bond if you sell it today?
5. Gary Kornig is 30 years old and wants to retire when he is 65. So far he has saved (1) $6,950
in an IRA account in which his money is earning 8.3 percent annually and (2) $5,000 in a
money market account in which he is earning 5.25 percent annually. Gary wants to have $1
million when he retires. Starting next year, he plans to invest the same amount of money
every year until he retires in a mutual fund in which he expects to earn 9 percent annually.
How much will Gary have to invest every year to achieve his savings goal?
6. You won a $100,000,000 lottery ticket. You must decide whether to choose the cash option or
the annual payment option. If you choose the annual payment option and win, you will
receive $100,000,000 in 25 equal payments of $4,000,000—one payment today and one
payment at the end of each of the next 24 years. If you choose the cash payment, you will
receive a one-time lump sum payment of $59,194,567.18. If you can invest the proceeds and
earn 6 percent, which option should you choose?
7. You borrowed $237,000 from Bank One at a rate of 6.6 percent compounded monthly 3 years
ago and agreed to pay this loan by making equal monthly payments in 15 years. Calculate
your monthly loan payment. Prepare the amortization schedule. Now, you have a big amount
of money and decide that you will pay off the loan, how much do you still owe the bank?
8. Question 1 (20 points): FPT Information Systems is planning to issue 10-year bonds. The going
market yield for such bonds is 9 percent. Assume that coupon payments will be made
semiannually. The firm is trying to decide between issuing an 8 percent coupon bond or a zero-
coupon bond. The company needs to raise $1 million. The face value of the bond is $1,000.
a. What will be the price of an 8 percent coupon bond? (5 points)
 b. How many 8 percent coupon bonds would have to be issued? (5 points)
c. What will be the price of a zero-coupon bonds? (5 points)
d. How many zero-coupon bonds will have to be issued? (5 points)
9. Question 2 (20 points): Tre-Bien, Inc., is a fast-growing technology company. Management
projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for
the following two years. After that, a constant growth rate of 8 percent is expected. The firm
expects to pay its first dividend of $2.45 a year from now. If dividends will grow at the same rate
as the firm and the required rate of return on stocks with similar risk is 22 percent, what is the
current price of the stock?
10. Question 3 (20 points): What is change in net working capital? Can this number be negative? Can
this negative number be sustainable?
11. Question 4 (20 points): You won a $100,000,000 lottery ticket. You must decide whether to
choose the cash option or the annual payment option. If you choose the annual payment option
and win, you will receive $100,000,000 in 30 equal payments of $4,000,000—one payment today
and one payment at the end of each of the next 29 years. If you choose the cash payment, you
will receive a one-time lump sum payment of $58,194,567.18. If you can invest the proceeds and
earn 6 percent, which option should you choose?
12. Question 5 (20 points): John Towler is saving for his son’s college tuition. His son is currently 11
years old and will begin college in seven years. He has an index fund investment of $7,500
earning 9.5 percent annually. The annual tuition fees at the University of Maryland where his son
will attend are estimated to be 25,000 in the first year his son enters the school and expected to
grow roughly at 6% inflation rate each year. Babu plans to invest in a mutual fund that will earn
11 percent annually to make up the difference between the college expenses and his current
savings. In total, Babu will make seven equal investments with the first starting today and with
the last being made a year before his son begins college. Assuming discount rate of 10% per
annum, how much will Babu have to invest every year in order for him to have enough funds to
cover all his son’s expenses?