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7 Cards in this Set
- Front
- Back
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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?
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PV of Perpetuity =
$200/0.08=$2,500 |
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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)
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= ($5,000 X 12)/0.10=$600,000
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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)
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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 |
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What are the monthly payments on a $100,000 loan to be paid off in 5 years at 6% interest?
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PV = Loan = 100,000
I/y = 6% annually FV = 0 (When loan is paid off) N = 5 years PMT=? ($23,739.64) |
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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.
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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 |
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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?
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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% |
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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) |
