5. Construct a pro forma income statement for the first year and second year for the following assumptions:
1Units of Sales in Year 1: 100,000
2Price per Unit: $10
3 Variable cost per unit: 30%
4 Fixed Costs: $120,000
5 Income taxes: 15%
6 Interest Expense: $200,000
7 In year 2, Price per unit increases to $11.50, and unit of sales increases by 3%, all other assumptions remain the same.
6.Calculate the sustainable growth based on the following information:
Earnings after taxes = $35,000
Equity = $100,000
d=22.4%
7.Calculate a table of interest rates for 5 years based on the following information:
o The pure interest rate is 2%
o Inflation expectations for year 1 = 3%, year 2 =4%, years 3-5 =5%
o The default risk is .1% for year one and increases by .1% over each year
o Liquidity premium is 0 for year 1 and increases by .2% each year
o Maturity risk premium is 0 for years 1 and 2 and .3% for years 3-5
1.Future value of single sum problem
You put $2,000 in an investment account today which will earn 8% over the next 14 years, what is the future value?
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2.Future value of single sum problem
You put $5,000 in an investment account today which will earn 6% over the next 11 years, what is the future value?
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3.Perpetuity problem
What is the value of a perpetuity with an annual payment of $100 and a discount rate of 6%?
4.Perpetuity problem
What is the value of a perpetuity with an annual payment of $50 and a discount rate of 4%?
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5.Future value of annuity problem
You deposit $5,000 into a retirement account at the end of the next 15 years earning 8% interest, what is the future value of your retirement after 15 years?
1.Valuation corporate bond
A $1,000 corporate bond with 20 years to maturity pays a coupon of 7% (semi-annual) and the market required rate of return is a) 6.6% b) 13%. What is the current selling price for a) and b)?
2.Valuation convertible bond
You purchased one of AAA Corp.s 9%, 15-year convertible bonds at its $1,000 par value a year ago when the companys common stock was selling for $25. Similar bonds without a conversion feature returned 10% at the time. The bond is convertible into stock at a price of $35. The stock is now selling for $40.
Assume no dividends.
a) You exercise the conversion feature today and immediately sold the stock you received. Calculate the total return on your investment.
b) What would your return have been if you had invested $1,000 in AAAs stock instead of the bond?
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3.Valuation zero-coupon bond
A U.S. Government bond with a face amount of $10,000 with 13 years to maturity is yielding 5.5%. What is the current selling price?
4.Valuation – preferred stock
What is the value of a share of preferred stock that pays a $4.50 dividend, assume k is 10%.
5.Valuation – Constant growth – common stock.
What is the value of a share of common stock that paid $2.00 last year, the growth rate is 8%, assume the risk free rate is 4%, the market return is 10% and the Beta is 1.5.
1.Holding Period Return
Based on the following information calculate the holding period return:
P0 = $10.00
P1 = $12.00
D1 = $1.22
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2.Risk and Return, Coefficient of Variation
Based on the following information, calculate the coefficient of variation and select the best investment based on the risk/reward relationship.
Std Dev. Exp. Return
Company A 10.4 15.2
Company B 14.6 22.9
3.Risk & Return and the CAPM.
Based on the following information, calculate the required return based on the CAPM:
Risk Free Rate = 3.5%
Market Return =10%
Beta = 1.08
