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a) Show the cash flows for the following four bonds, each of which has a par value of $1000 and pays interest annually.

Bond………Coupon Rate (%)……….Number of Years to Maturity………..Price
W……………………7…………………………………….5………………………………$884.20
X…………………….8…………………………………….7………………………………$948.90
Y…………………….9…………………………………….4………………………………$967.70
Z…………………….0…………………………………….10…………………………….$456.39

b) Calculate the yield to maturity for the four bonds

1. Firm Alpha issues one million face value nice percent semi-annual coupon bonds at a price to yield eight percent compound semiannually. Firm Bravo issues one million face value, seven percent semi-annual coupon bonds at a price to yield eight percent compound semi-annually. Both bond issues mature in twenty years. Will these firms receive the same the same initial issue price for these bonds?

2. How is a lessee’s capital lease similar to, and different from, purchasing the equipment using the proceeds of a loan repayable in installments?

A financial planner has offered you three possible options for receiving cash flows. You must choose the option that has the highest present value.

(1) $1,000 now and another $1,000 at the beginning of each of the 11 subsequent months during the remainder of the year, to be deposited in an account paying a 12 percent nominal annual rate, but compounded monthly (to be left on deposit for the year).

(2) $12,750 at the end of the year (assume a 12 percent nominal interest rate with semiannual compounding).

(3) A payment scheme of 8 quarterly payments made over the next two years. The first payment of $800 is to be made at the end of the current quarter. Payments will increase by 20 percent each quarter. The money is to be deposited in an account paying a 12 percent nominal annual rate, but compounded quarterly (to be left on deposit for the entire 2-year period).

Which one would you choose?
a. Choice 1.
b. Choice 2.
c. Choice 3.
d. Any one, since they all have the same present value.
e. Choice 1, if the payments were made at the end of each month.

The executive VP just e-mailed us with a clear message:

We need to finish evaluating the decision to purchase the equipment for the new project if it is to be kept in-house. The VP of manufacturing identified all of the expected cash flows for the project versus the cost of outsourcing the project to one of its supply chain partners.

Following are those positive and negative cash flows for each of the projects over a 4-year period:

– Assume that BlueJay will have access to a 12% cost of capital for the NPV calculation
– Use the Payback Period method and NPV to calculate and compare the results for Project A and Project B
– Prepare a project summary that details which of the two alternatives you would recommend to the senior
management team and why

Marcal Corporation is considering foreign direct investment in Asia. The company estimates that the project would require an initial investment of $14 million. and generate positive cash flows of $2 million a year at the end of each of the next 20 years. The project’s cost of capital is 12%.

a. Calculate the project’s NPV.

b. The company thinks there is a 50-50 chance that the Asian country will impose restrictions on the company in one year. If the restrictions are imposed, cash flows will be $1,000,000 per year for 20 years. If restrictions are not imposed, cash flows will be $3,000,000 per year for 20 years. In either case, the cost will remain at $14,000,000. If the company waits one year, what is the project’s NPV with restrictions and without restrictions.

c. Calculate the value of the option if the company waits one year. Should the company wait or go ahead with the project now?

d. Discuss 2-3 factors other than the value of the real option that the company should consider in making its decision.

Company Valuation

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Company Valuation:

Go to http://finance.yahoo.com/q?s=GE and, under Financials, download the income statement, balance sheet, and cash flow statement. GE is one of the holdings in the trust fund. Develop a valuation analysis for the intrinsic value of GE stock. The analysis should incorporate CAPM and the single-stage DDM. Refer to “Key Statistics” in the Yahoo site for additional model variable values such as beta.
Also, using FCFF (single-stage), calculate the intrinsic value of the firm.

Be sure to show all the detail of your calculations and of your computations of the inputs (e.g., g, k, WACC) and to document your research sources for inputs required for your valuation formulas (e.g., Equity Risk Premium). State and justify your conclusion as to whether GE is undervalued, overvalued, or fairly valued and why you believe that to be the case for each of the three methods. Also, state a conclusion as to which of the three methods might appear most reasonable to rely upon.

Using the analytical tools of growth accounting and/or the neoclassical (Solow) growth theory, comment on the following real life questions from Asia’s economic development.

A. Many developing countries—China and India being notable examples—have pursued in the past policies to curb population growth. What was the rationale? What was the impact of this policy on the level and growth in GDP as well as per capita GDP?

B. In his famous 1994 article in Foreign Affairs, Nobel Laureate Paul Krugman argued that Asia’s economic growth was driven more by “perspiration” than “inspiration”. A key element of “perspiration” was increasing saving, and hence, investment, by suppressing consumption. Assess the impact of such policy on per capita GDP growth.

C. China’s policy to curb population growth (e.g. “one-child policy” from 1978) proved more effective than India’s. As a result, China is now at a demographic turning point, where the population is beginning to age and dependency ratio is rising (more older population to support per working population). By contrast, India still has one of the youngest demographic structures. What are the implications of these demographic differences for growth in GDP and per capita GDP in China and India over the next generation (i.e., next 20-30 years)?

D. Many Asian countries have been able to narrow the gap in their living standard with rich countries. What has been more challenging is further closing the gap once they reached the middle income level (e.g. around USD5,000-10,000 per capita GDP). Why is it generally “easier” for a poor country to narrow the gap with rich countries when they are starting out poor? What do countries need to do escape the “middle income trap”?