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7.13 Expected returns: Jose is thinking about purchasing a soft drink machine and placing it in a business office. He knows that there is a 5 percent probability that someone who walks by the machine will make a purchase from the machine, and he knows that the profit on each soft drink sold is$0.10. If Jose expects a thousand people per day to pass by the machine and requires a complete return of his investment in one year, then what is the maximum price that he should be willing to pay for the soft drink machine? Assume 250 working days in a year and ignore taxes and the time value of money.
8.2 Bond price: Pierre Dupont just received a cash gift from his grandfather. He plans to invest I a five year bond issued by Venice Corp. that pays an annual coupon of 5.5 percent. If the current market rate is 7.25 percent, what is the maximum amount Pierre should be willing to pay for this bond?
8.6 Zero coupon bonds: Diane Carter is interested in buying a five year zero coupon bond with a face value of $1,000. She understands that the market interest rate for similar investments is 9 percent. Assume annual coupon payments. What is the current value of the bond?
8.9 Yield to maturity: Ruth Hornsby is looking to invest in a three year bond that makes semiannual coupon payment at a rate of 5.875 percent. If these bonds have a market price of $981.18, what yield to maturity and effective annual yield can she expect to earn?
9.5 Present value of dividends: Fresno Corp. is a fast growing company that expects to grow at a rate of 30 percent over the next two year and then to slow to a growth rate of 18 percent for the following three years. If the last dividend paid by the company was $2.15, estimate the dividends for the next five years. Compute the present value of the dividends if the required rate of return is 14 percent.
9.6 Zero growth: Nynet, Inc., paid a dividend of $4.18 last year. The company’s management does not to expect to increase its dividend in the foreseeable future. If the required rate of return is 18.5 percent, what is the current value of the stock?
9.10 Constant growth: Moriband Corp. paid a dividend of $2.15 yesterday. The company’s dividend is expected to grow at a steady rate of 5 percent for the foreseeable future. If investors in stocks of companies like Moriband require a rate of return of 15 percent, whats hould be the market price of Moriband stock?
9.15 Preferred stock valuation: The first Bank of Ellicott City has issued perpetual preferred stock with a $100 per value. The bank pays a quarterly dividend of $1.65 on the stock. What is the current price of this preferred stock given a requires rate of return of 11.6 percent?