Practice Problem

1. An investment in Woods Public Relations, Inc. offers $5,000 per year for 10 years, with the first payment occurring one year from now.  If the required return is 11%, what is the value of the investment today?

1. Friedman Music and Comedy, Inc. has 8% coupon bonds on the market that have 10 years left to maturity.  The bonds make annual payments.  If the YTM on these bonds is 7%, what is the current bond price (assume $1,000 denomination)?

1. The Nowitzki German Food Chain, Inc. just paid a $2.00 dividend per share on its common stock.  The dividends are expected to grow at a constant rate of 7% per year indefinitely.  If investors require a 10% return on investments with this level of risk, what should the current price be?  What will the price be in three years?

1. Andrus, Kinsler and Davis Sports Apparel, Inc.  is expected to pay a constant $5.00 per share annual dividend on its shares.  If the growth rate is expected to be a constant 5% per year, what required return is implied by a $45 share price?

1. The Cuban, Jones, and Greenberg Agency, Inc. is considering introducing a new product.  The product will require the company to make a capital investment of $35,000.  Research and development expenditures of $4,000 have already been incurred to perfect the product.  Cash flows from this project alone for the next three years are expected to be $20,000, $21,000, and $18,000. These cash flow will result in a $2,500 reduction in cash flows from existing projects in each of the next three years.  If the required return is 11%, should the company acquire the capital investment necessary to assemble and introduce the product?  

1. Following is a Pro Forma Statement of Income and Projected Capital Requirements for the Obama, Pelosi and Reid Trama Care Hospital, Inc.:

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If our required return is 25%, should we accept or reject this project?

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