FINA-2360-2E Assignment 2 Due: 11:00PM (AST), March 10, 2025

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1
 This assignment includes 7 short-answer questions. Please clearly label your answers. Keep four decimals
in your middle calculation and TWO decimals in your final answer.

1. (5 points) You are the owner of 100 bonds issued by Lily Inc. These bonds have 8 years remaining
to maturity, an annual coupon payment of $80, and a par value of $1,000. Unfortunately, Lily Inc.
is on the brink of bankruptcy. The creditors, including yourself, have agreed to a postponement of
the next 4 interest payments (otherwise, the next interest payment would have been due in one year).
The remaining interest payments, for year 5 through 8, will be made as scheduled. The postponed
payments will accrue interest at an annual rate of 6%, and they will then be paid as a lump sum at
maturity 8 years hence. The required rate of return on these bonds, considering their substantial
risk, is now 28%.
What is the present value of each bond (Price today)?

17 Bond Face value $1, 000 : ,

Annual $80
Coupon :

8
Years to maturity :

Interest postponement : 4 years

Accrual rate : 6%
28 %
Required return :

$80 06" $101 16

postponed 1
:
coupons
·

of
=
FV
.

PV of future lump sum : $1

16 .
= $15 37 .

11 28

PV of
remaining coupons :
50 = $23. 7

10 =
$18 5 .

100 07
=
$14 49 .

#$11 . 32

Sum of the PV :

$81
11 32
0
18 35 + 14 49 + =

15 57 23 75
.

+
. .

+
/
.

.
.

2
 2. (5 points) Pepper is a young start-up company. No dividends will be paid on the stock over the next
four years because the firm needs to plowback its earnings to future growth. The company will pay
a $1.25 per share dividend in 5 years and will increase the dividend by 10 percent per year for 5
years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is 12
percent. The market price of Pepper is $13 per share currently.
a. What is the current share price?
b. Is the stock overpriced, underpriced, or fair priced? What is your investment strategy on Pepper’s
stock?

2)a) Dividends years 6-9 :

$1 25 1 10 $1 375
y6
= .

-
.

: .

$1 51
.

$1 373 1 10 =

y7
.
.

:
.
.

51 1 10 $1 66
$1
= .
.

y8
.

:
.

1 10
= $1 83 .

$1 66
y9
. .

: .

year 9
:
Terminal value in
$1 83 1 06 $1 94
year's dividend
= .

next
-
.

: .

terminal value
:M = $3

Discount cash flows to

year
O :

= $0 . 7

= $0 70 .

-$0 . 0

#66 $0 67 .

33)
11
83+$34 $1822
.
.

$20
Sum : 0 71 .
+ 0 . 70 + 0 68 .
+ 0 67.
+ 18 12.
=
.

88/

$13 but its fair value it's $20 88

at
avrently trading
.

b) Overpriced. It is ,

=>

3
 3. (5 points) ABC Inc’s first quarterly dividend of $2 per share is expected to be paid 6 months from
today. From then on, dividends will grow by 2% per quarter for three years. After three years, the
dividends will start declining by 1% per quarter in perpetuity. Assume that ABC’s required rate of
return is 15% (Effective annual rate). What is the price of a share of ABC today?

months from nowl

3) First dividend $216 :

Growth 3 years : 2 % per quarter

Growth after : -1 % per .

quarter
Return required : 13 % (EAR)

*
Quarterly discount rate 11 :

+ 0 .
13) -
1 = 0 0355
.

Present values 12 dividends :

1: $2/1 0355 .
=
$1 . 93

/233
2 $2 1 02
$1
$1 91
:
10
-
:
.

=
=

To3z
.

3
:$1 0

11
230n $1 7
:

= .

4
: $1 8
O =
.

S :$
= $1 . 80 12 1

6 :
2 16 1
02.
.

.
= $1 85 .

S
1 .
0355

! $18
7
: =

8
:$10
$2
P
21
:
.

Dividend 13 : 1 76 .
·
(1-0 .
01) $2 =
.
28

Terminal value $2 28
:
$50 03
.

=
-
.

0 035570 01
.
.

300 = $33 76
.

1 81t
1 85 187 + 1 82 +
1 90 +
1 808 + 1 87 + +
.

1 91
.

+
1 93 +
.

PV
. .

all
.

: .

$67
%
sum
1 78 + 1 76 + 33 76 =

1.79 +
.
.

4
 4. (5 points) The stocks of Wonka Inc. are expected to sell for $20 per share in three years from now.
Wonka has just paid a dividend of $1.50 per share and the dividends are expected to grow at a rate
of 7% per year for the next three years and at a certain constant rate afterwards. Assume the required
rate of return is 15%.
a. What is the expected constant growth rate beginning in year 4?
b. What is the current price for Wonka stock?

4)a) stock price

3 year
$20 :

%
$1 87
dividend 3r year
:
.

Growth rate :

$20 $1 84 =
.
.

-
(1 +
g)
(0 . 15 -

g)
$20 ·
10 15 .
-

g) = $1 84 (1
.
. +
g)
$1 84 $1
$3 $209
= +
849
.

.
-

$1 . 16 = $21 849 .

0 0531
g
= .

constant growth
rate :
5 .

3
-

4) b) current stock price

:1
=

$135)

5
 5. An asset was purchased for $40,000 and belongs to an asset class with a 20% CCA rate is
depreciated over time for tax purposes.
a. What is the undepreciated capital cost (UCC) at the end of the second year after the purchase?
b. Suppose the asset is sold for $26,000 after three years and the asset pool is terminated. Will the
firm have any terminal loss or recaptured CCA? How much is it?

0 20
=
$4 , 000
5) a) Year $40 000 0 5
1
.
.

.
.

: ,

$36 000
$40,000 $7 000
=
,
-

0 20
= $7 200
$36 000
Year
,

2:
.
.

800
,

$7, 200 = $28 ,

$36, 000 -
-

(1-0 20) $23 000

$28
=

800 ·
. ,

after 3 years
:

UCC
,

5) b) $2 960
$23,040
=
$26 000 ,

Recapture
-
:
,

of $2 960
CA
,

re

6
 6. (5 points) A company is expected to pay a dividend of $1.50 at the end of this year and $2.00
dividend at the end of year 2. Thereafter, it is estimated that dividends will grow at a constant rate
of 5% per year for next 4 years and then start declining at a constant rate of 1% in perpetuity.
Investors require a return of 10%. What is the current market value of this company’s common
stock?

3-6 :
6) Dividends years
$2 10
3 : $2 00 .
·
1 05.
= .

1 05
: $2 21
$2 10
.

4
. .

: .

$2 21
- 1 03 :
$2 32
5
.
.

: .

$2 32-1 05 = $2 43
6
.

:
.

6
Terminal value
:

year
(1 0 01) $2 41
$2
=

43
- .

. .

- = $21

Discost(PV) :

50 $1 65
1. 10
=
.

#3 = $

#00-$1 #23th141 $1
:

= $158

=
$1

$1 $1 44 + $10 44 =
$100
+ $1 58 + 51 + .
.

7
$1 65
.
.

$1 36 + .

Sum : .
 7. (5 points) Using the following information:

Calculate the following ratios:

a. Debt to Equity Ratio
b. Quick Ratio
c. Fixed Asset Turnover
d. Return on Equity
e. Days’ Sales in Inventory

=
debt -
7))
=
68

rent
7) b) actment
7)
datasets 5
= 2 .

930)

7) d) a
incomeearity =

7)e) Average Inventor . 35 =) = 8