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7 Cards in this Set

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An acre of land rents for $200 per year. If you want to earn 8% on your investment, what is the value/price of land?
PV of Perpetuity =
$200/0.08=$2,500
PROBLEM: A house rents for $5000 per month. If a similar investments yield 10% annually, how much is the house worth? (USE THE PERPETUITY FORMULA)
= ($5,000 X 12)/0.10=$600,000
You deposit $400 in the bank earning 8% annually, where interest is compounded quarterly. After 6 years what will be the ending balance ? (calculate FV)
Annual compounding:
PV = -$400
PMT = 0
No. of periods = n = 6 years
I/y = 8%
FV = ? ($634.75) Compounded annually
FV = $450.46 quarterly
To calculate quarterly =
6 years X 4 quarters = 24 payments
I/y = 8%/4 quarters = 2%
ANSWER = $643.37
What are the monthly payments on a $100,000 loan to be paid off in 5 years at 6% interest?
PV = Loan = 100,000
I/y = 6% annually
FV = 0 (When loan is paid off)
N = 5 years
PMT=? ($23,739.64)
The Shrieves Corp. has $10,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 7.5%, state of Florida mini bonds, which yield 5%, and AT&T preferred stock, with a dividend yield of 6%. Shrieves's corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax returns on both securities.
Bond AT&T = 7.5% (Before tax yields)
Flor. Muni = 5%
T = .35
AT&T Pref. Stock = 6% (70% tax exempt)
ATY = (Before tax yield)(1 – T)
ATT Bond = (7.5%)(1 - .35)
= (7.5)(.65)
= 4.88% ATY

Flor. Muni = (5%)(1 – 0) = 5%

Pref. Stock = (6%)[1-(.3)(.35)]
= (6%)(1 - .105)
= (6%)(.895)
= 5.37% - Highest after tax yield from preferred stock
3-2: Corporate bonds issued by Johnson Corporation currently yield 8%. Municipal bonds of equal risk currently yield 6%. At what tax rate would an investor be indifferent between these two bonds?
After Tax Yield (ATy) = (Before tax yield, BTy)(1-T)

(8%)(1-T) = (6%)(1-0) = 6%

(.08(1-T) = .06
.08 - .08T = .06
-.08T = .06-.08
-.08T = -.02
T = .02/.08 = 25%
Problem 6-2
Assume that the risk-free rate is 6% and the expected return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.7?
rRF = 6%
rm = 13%
b = 0.7

ri = rRF + {(rm - rRF)(bi)]
= 6% + (13% - 6%)(0.7)
= 6% + (7%)(0.7)
= 6% + 4.9%
= 10.9% (ANSWER)