12. Suppose you just won the state lottery, and you have a choice between recelv
ID: 2803842 • Letter: 1
Question
12. Suppose you just won the state lottery, and you have a choice between recelvill $2,575,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes. a. b. c. d. c. 6.41% 7.37% 4.74% 7.44% 7.13% 13. Adams Enterprises noncallable bonds currently sell for $910. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to b. c. d. e. 7.34% 9.66% 8.60% 9.95% 11.21% 14. Which of the following statements is CORRECT? a. To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital. To implement the corporate valuation model, we discount after taxes (NOPAT) at the weighted average cost of capital. To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital. To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital. b. net operating profit c. d. 15. Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 70%, at what price should the bonds sell? a. $1,040.28 b. $802.25 c. $1,013.84 d. $775.81 e $881.60Explanation / Answer
Question 12). Answer :- Option b). 7.37 %
Explanation :- Cumulative present value factors for 20 years = 2575000 / 25000
= 10.30
Cumulative present value factors for 20 years equivalent to 10.30 represents / denotes to the 7.37 % rate of return mentioned in the option (b).
Verification :-
Cumulative present value factors for 20 years at the rate of return 7.37 % = [ 1 - (1 + 0.0737)-20 ] / 0.0737
= [ 1 - (1.0737)-20 ] / 0.0737
= [ 1 - 0.2412 ] / 0.0737
= 0.7588 / 0.0737
= 10.2958 (Rounded off to 10.3)
Question 13). Answer :- Option b). 9.66 %
Explanation :- Calculation of Yield to maturity (YTM) on the bond :-
Yield to maturity (YTM) = [ Coupon amount + (Face value of bond - Bond price) / Number of Years to maturity for the bond ] / (Face value of bond + Bond price) / 2
= [ 85 + (1000 - 910) / 15 ] / (1000 + 910) / 2
= [ 85 + 90 / 15 ] / (1910 / 2)
= [ 85 + 6 ] / 955
= 91 / 955
= 0.0953 i.e., 9.53 % (Most nearest to the 9.66 % mentioned in option b to the given question).
Question 14). Answer :- Option a). To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital.
Explanation :- Projected free cash flows are discounted at weighted average cost of capital (WACC) while implementing the corporate valuation model in the finance subject.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.