Congratulations! You have been hired as Chief Financial Officer at The Nebraska
ID: 2751648 • Letter: C
Question
Congratulations! You have been hired as Chief Financial Officer at The Nebraska Medical Center (TNMC). Your responsibilities include thoroughly understanding TNMC’s finances and you may be asked to perform some additional miscellaneous tasks by TNMC’s new CEO, Bill Lumbergh.
(a) On your very first day, Bill asks you to help him with his retirement planning. Bill is now 50 years old and plans to retire in 10 years. He wants to have a total of $400,000 in savings in 10 years when he retires. He currently has $100,000 saved up; and he expects to earn a return on his savings of 8 percent per year, annual compounding. To the nearest dollar, how much must Bill save during each of the next 10 years (with deposits being made at the end of each year) to meet his retirement goal?
(b) Bill has asked you to stay after work to explain to him the nuances of bond valuation in preparation for a presentation to the board of directors. Calculate the value of a 10-year, $1,000 par value bond with a 10 percent annual coupon if its required rate of return is 5 percent (round to the nearest dollar).
(c) Although TNMC is a non-profit with no possibility of future stock offerings, Bill wants you to prepare for this contingency by performing securities valuation on a hypothetical TNMC stock issue. You assume that TNMC would have a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 7 percent, and that the market risk premium would be 5 percent. What would be the required rate of return on TNMC’s stock?
(d) Calculate TNMC’s expected current stock price if TNMC is a constant growth company whose last dividend (D0, which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a 6 percent rate. (Hint: Use your answer for the required rate of return from above)
Explanation / Answer
a)
Annual Deposit required = pmt(rate,nper,pv,fv)
rate = 8%
nper = 10
pv = -100000
fv =400000
Annual Deposit required = pmt(8%,10,-100000,400000)
Annual Deposit required = $ 12708.85
b)
Bond Value = pv(rate, nper,pmt,fv)
Nper (indicates the period) = 10
PV (indicates the price) = ?
PMT (indicate the annual payment) = 1000*10% = 100
FV (indicates the face value) = 1000
Rate (indicates YTM) = 5%
Bond Value = pv( 5%,10,100,1000)
Bond Value = $ 1386.09
c)
As per CAPM
Required rate of return =Rf + (Rm-Rf)*Beta
Required rate of return = 7 + 5*1.2
Required rate of return = 13%
d)
TNMC’s expected current stock price = Expected Dividend/(Required Return -growth rate)
TNMC’s expected current stock price = 2*1.06/(13%-6%)
TNMC’s expected current stock price = $ 30.29
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