COM 240 Homework 4: Covers Topics 4 & 5 Compound & Prosper! COM 240 Frederick H. Willeboordse [email protected] 1 COM 240 Assignments Use a spreadsheet for all your homework. Submit the printout of this spreadsheet on the due date. Please make sure to put your name and student number on top. 1) Exactly 2 years ago we invested $3,600 in a 5 year bond with a coupon rate of 6%. Since then interest rates have dropped and currently 3 year bonds have a coupon rate of 2%. What is the present value of the bond I purchased 2 years ago? 2 COM 240 Assignments We have a company that has just paid $3.67 dividends per share. If we want a return of 12%, 2-a) What is the value of the share in the fixed dividend model? 2b) What is the value of the share in the growing dividend model if the dividend is assumed to grow at 5% per year? 3 COM 240 Assignments 3) Project Evaluation. We have a company that is considering making an investment in a new factory. The financial manager makes the following assumptions: Extra free cash flow in the first year is $98,000 The free cash flow grows by 5% per year (after the first year) Cost of Equity: 25% Cost of Debt: 6% Tax Rate: 40% Company’s target debt-equity ratio is 1/4. If the financial manager uses the WACC approach, what will s/he recommend this investment to maximally cost? Motivate your answer. 4
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