Lahore School of Economics

Financial Management II
Review of FM I Assignment

1. Suppose you currently have $2,000 and plan to purchase a 3-year certificate of deposit (CD) that pays 4% interest
compounded annually. How much will you have when the CD matures?

2. How much would $1,000,000 due in 100 years be worth today if the discount rate was 5%?

3. A company’s sales in 2008 were $100 million. If sales grow at 8%, what will they be 10 years later, in 2018?

4. The U.S. Treasury offers to sell you a bond for $585.43. No payments will be made until the bond matures 10 years from
now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond for $585.43?

5. Your grandfather suggested that you get in the habit of saving early in life. You start putting aside $1,825 every year at
the end of the year in an online brokerage mutual fund account that has a return of 8% when you turn 18. If you continue
saving in this way for the rest of your life, how much do you expect to have in your account when you turn 65?

6. Assume that you are offered an annuity that pays $100 at the end of each year for 10 years. You could earn 8% on your
money in other investments with equal risk. What is the most you should pay for the annuity?

7. Suppose you inherited $100,000 and invested it at 7% per year. How much could you withdraw at the end of each of the
next 10 years?

8. You are considering a 10-year, $1,000 par value bond. Its coupon rate is 9%, and interest is paid semiannually. If market
interest rate is 8.16%, what is the current price of the bond?

9. Halley Enterprises’ bonds currently sell for $975. They have a 7-year maturity, an annual coupon of $90, and a par value
of $1,000. What is their yield to maturity?

10. A company recently paid a dividend of $2 and is expected to grow at a constant rate of 6%. The beta of its stock is 1.2.
Currently, the risk-free rate is 7% and return on the market is 12%.
a) Calculate the required rate of return, 𝑟𝑠 , of the stock.
b) What is the stock’s intrinsic value?
c) What is the stock’s expected value, one year from now?
d) Find expected dividend yield, capital gains yield, and total return during first year.

11. Ezzell Corporation issued perpetual preferred stock with a 10% annual dividend. The stock currently yields 8%, and its
par value is $100. What is the stock’s value?

12. Percy Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to
maturity on the company’s outstanding bonds is 9%, and its tax rate is 40%. Percy’s CFO estimates that the company’s cost
of common equity is 13%. What is Percy’s WACC?