SHOW WORKFOR EACH QUESTION
1. Your parents have an investment portfolio of $400,000, and they wish to take out cash flows of $50,000 per
year as an ordinary annuity. How long will their portfolio last if the portfolio is invested at an annual rate of
4.90%? Use a calculator to determine your answer.
2. Johnson Construction Inc. has issued 20-year $1,000 face value, 17% annual coupon bonds, with a yield to
maturity of 11%. The current price of the bond is ________.
3. Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 5.50%. What is
your investment worth in one year?
4. Your firm intends to finance the purchase of a new construction crane. The cost is $1,500,000. What is the
size of the annual ordinary annuity payment if the loan is amortized over a six-year period at a rate of 8.50%?
5. The next dividend (Div1) is $1.80, the growth rate (g) is 9%, and the required rate of return (r) is 12%.
What is the stock price, according to the constant growth dividend model?
6. You want to invest in a stock that pays $5.00 annual cash dividends for the next four years. At the end of
the six years, you will sell the stock for $20.00. If you want to earn 12% on this investment, what is a fair price
for this stock if you buy it today?
SHOW WORKFOR EACH QUESTION
1. Your parents have an investment portfolio of $400,000, and they wish to take out cash flows of $50,000 per
year as an ordinary annuity. How long will their portfolio last if the portfolio is invested at an annual rate of
4.90%? Use a calculator to determine your answer.
2. Johnson Construction Inc. has issued 20-year $1,000 face value, 17% annual coupon bonds, with a yield to
maturity of 11%. The current price of the bond is ________.
3. Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 5.50%. What is
your investment worth in one year?
4. Your firm intends to finance the purchase of a new construction crane. The cost is $1,500,000. What is the
size of the annual ordinary annuity payment if the loan is amortized over a six-year period at a rate of 8.50%?
5. The next dividend (Div1) is $1.80, the growth rate (g) is 9%, and the required rate of return (r) is 12%.
What is the stock price, according to the constant growth dividend model?
6. You want to invest in a stock that pays $5.00 annual cash dividends for the next four years. At the end of
the six years, you will sell the stock for $20.00. If you want to earn 12% on this investment, what is a fair price
for this stock if you buy it today?