Finance Problems

Finance Problems

1 A) Project A NPV = $ 2326

Project B NPV = $ 1992

1 B) Project A IRR = 14%

Project B IRR = 12%

Project A

-48000

Project b

-126900

Year 1

18400

Year 1

69,700

Year 2

31300

Year 2

80,900

Year 3

11,700

Year 3

0

NPV

50,326

NPV

$128,891.56

Less Outflows

-48000

-126900

NPV

$ 2,326

$ 1991.56

IRR

14%

12%

1 C) Project A should be accepted as its NPV is greater that Project B. Its IRR is comparatively greater as well as compared to the Project B; hence Project A should be accepted by the company.

2) YTM Formula = C + F-P

n F + P

2

Coupon = $ 80

Face Value = $ 1000

Price = $ 932

Number of Years = 4

YTM = 80 + (1000-923)

4

1000 + 932

2

= 99.25 966

= 10.27%

3 A) Stock Price = D (1+g) / (r-g)

D = Dividend

G = Growth Rate

R = required rate of return

64.20 = 3 (1 + 0.12)/ (0.12 - g)

7.704 - 64.20g = 3.36

64.20g = 11.064

G = 11.064/64.20

G = 0.172 or 17.23%

3 B) Stock Price = D (1+g) / (r-g)

Stock Price = 3 (1 + 0.12)/ (0.12 - 0.065)

= 3.36

0.055

= $ 61.09

The price will fall from $ 64.20 to $ 61.09. This is attributed to the bad news in the market that the company's growth rate has fallen which leads to more people selling the company's stock. This would lead to downward pressure on the company's stock.

3 C) Company growths are vital for all the stockholders, when the company retains its dividends this leads to better growth for the company. When growth is expected investors will hold on to the stock and good expectations will have a positive impact on the price of the stock. Capital Budgeting decisions will depend greatly on the stock price as the healthier the company's stock price the company will be in more secure position to finance its capital projects. This ...