1. .

Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual fee of $950 and has an existing customer base of 690. Paul plans to raise the annual fee by 6 percent every year and expects the club membership to grow at a constant rate of 2 percent for the next five years. The overall expenses of running the health club are $134,000 a year and are expected to grow at the inflation rate of 2 percent annually. After five years, Paul plans to buy a luxury boat for $590,000, close the health club, and travel the world in his boat for the rest of his life. Assume Paul has a remaining life of 25 years and earns 9 percent on his savings. (Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).)

2.

How much will Paul have in his savings on the day he starts his world tour assuming he has already paid for his boat?

3.

Account value at retirement

$ [removed]

4.

What is the annual amount that Paul can spend while on his world tour if he will have no money left in the bank when he dies?

5.

Annual withdrawal

$ [removed]

6.

3.

On September 1, 2011, Susan Chao bought a motorcycle for $21,000. She paid $1,100 down and financed the balance with a five-year loan at a stated annual interest rate of 6.3 percent compounded monthly. She started the monthly payments exactly one month after the purchase (i.e., October 1, 2011). Two years later, at the end of October 2013, Susan got a new job and decided to pay off the loan.

If the bank charges her a 2 percent prepayment penalty based on the loan balance, how much must she pay the bank on November 1, 2013? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

5.

Pre Satellite Corporation earned $21 million for the fiscal year ending yesterday. The firm also paid out 30 percent of its earnings as dividends yesterday. The firm will continue to pay out 30 percent of its earnings as annual, end-of-year dividends. The remaining 70 percent of earnings is retained by the company for use in projects. The company has 1.5 million shares of common stock outstanding. The current stock price is $81. The historical return on equity (ROE) of 14 percent is expected to continue in the future.

What is the required rate of return on the stock?

6.

Pasqually Mineral Water, Inc., will pay a quarterly dividend per share of $1.65 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1.7 percent forever. The appropriate rate of return on the stock is 15 percent, compounded quarterly.

What is the current stock price?

7.

The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY).

a.

Suppose that today you buy a bond with an annual coupon of 11 percent for $1,060. The bond has 20 years to maturity. What rate of return do you expect to earn on your investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Expected rate of return

[removed]%

b1.

Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

Bond price

$ [removed]

b2.

What is the HPY on your investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

8.

Laurel, Inc., and Hardy Corp. both have 8 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has three years to maturity, whereas the Hardy Corp. bond has 20 years to maturity.

If interest rates suddenly rise by 2 percent, what is the percentage change in the price of each bond? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).)

Percentage change in price of Laurel, Inc., bond

[removed]%

Percentage change in price of Hardy Corp. bond

[removed]%

If rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of each bond? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).)

Percentage change in price of Laurel, Inc., bond

[removed]%

Percentage change in price of Hardy Corp. bond

[removed]%

Williamson, Inc., has a debt-to-equity ratio of 2.58. The firm’s weighted average cost of capital is 11 percent, and its pretax cost of debt is 5 percent. Williamson is subject to a corporate tax rate of 30 percent.

a. What is Williamson’s cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Cost of equity capital %

b.

What is Williamson’s unlevered cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Unlevered cost of equity %

c.

What would Williamson’s weighted average cost of capital be if the firm’s debt-to-equity ratio were .70 and 1.65? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).)

9.Young Corporation expects an EBIT of $22,500 every year forever. The company currently has no debt, and its cost of equity is 12 percent. The corporate tax rate is 35 percent.

a.

What is the current value of the company? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

Current value $

b-1

Suppose the company can borrow at 7 percent. What will the value of the firm be if the company takes on debt equal to 60 percent of its unlevered value? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

Value of the firm $

b-2

Suppose the company can borrow at 7 percent. What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

Value of the firm $

c-1

What will the value of the firm be if the company takes on debt equal to 60 percent of its levered value? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

Value of the firm $

c-2

What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

Value of the firm $

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