Home » The real rate of return carl foster, a trainee at an investment

The real rate of return carl foster, a trainee at an investment

P6–1 Interest rate fundamentals:

The real rate of return Carl Foster, a trainee at an investment banking firm, is trying to get an idea of what real rate of return investors are expecting in today’s marketplace. He has looked up the rate paid on 3-month U.S. Treasury bills and found it to be 5.5%. He has decided to use the rate of change in the Consumer Price Index as a proxy for the inflationary expectations of investors. That annualized rate now stands at 3%. On the basis of the information that Carl has collected, what estimate can he make of the real rate of return?

P6–10 Bond interest payments before and after taxes

Charter Corp. has issued 2,500 debentures with a total principal value of $2,500,000. The bonds have a coupon interest rate of 7%.

a. What dollar amount of interest per bond can an investor expect to receive each year from Charter?

b. What is Charter’s total interest expense per year associated with this bond issue?

c. Assuming that Charter is in a 35% corporate tax bracket, what is the company’s net after-tax interest cost associated with this bond issue?

P6–13 Valuation of assets

Using the information provided in the following table, find the value of each asset.

Cash flow

Asset                               End of year               Amount                   Appropriate required return

A                                               1                         $ 5,000                                      18%

                                                  2                            5,000

                                                  3                            5,000

B                                                1 through            $    300                                      15%

C                                                1                         $        0                                      16%

                                                   2                                   0

                                                   3                                   0

                                                   4                                   0

                                                   5                           35,000

D                                                 1 through 5         $ 1,500                                      12%

                                                    6                             8,500

E                                                  1                         $ 2,000                                      14%

                                                     2                            3,000

                                                     3                            5,000

                                                     4                            7,000

                                                     5                            4,000

                                                     6                            1,000

P6–20 Yield to maturity

The relationship between a bond’s yield to maturity and coupon interest rate can be used to predict its pricing level. For each of the bonds listed, state whether the price of the bond will be at a premium to par, at par, or at a discount to par.

Bond Coupon            interest rate         Yield to maturity     Price

A                                                6%                        10%             _________

B                                                  8                            8                _________

C                                                  9                            7                 _________

D                                                  7                             9                _________

E                                                12                            10               _________


P7–1 Authorized and available shares

Aspin Corporation’s charter authorizes issuance of 2,000,000 shares of common stock. Currently, 1,400,000 shares are outstanding, and 100,000 shares are being held as treasury stock. The firm wishes to raise $48,000,000 for a plant expansion. Discussions with its investment bankers indicate that the sale of new common stock will net the firm $60 per share.

a. What is the maximum number of new shares of common stock that the firm can sell without receiving further authorization from shareholders?

b. Judging on the basis of the data given and your finding in part a, will the firm be able to raise the needed funds without receiving further authorization?

c. What must the firm do to obtain authorization to issue more than the number of shares found in part a?

P7–6 Common stock value—Zero growth

Kelsey Drums, Inc., is a well-established supplier of fine percussion instruments to orchestras all over the United States. The company’s class A common stock has paid a dividend of $5.00 per share per year for the last 15 years. Management expects to continue to pay at that amount for the foreseeable future. Sally Talbot purchased 100 shares of Kelsey class A common 10 years ago at a time when the required rate of return for the stock was 16%. She wants to sell her shares today. The current required rate of return for the stock is 12%. How much capital gain or loss will Sally have on her shares?


P7–14 Common stock value—All growth models

You are evaluating the potential purchase of a small business currently generating $42,500 of after-tax cash flow Do =$ 42,500. On the basis of a review of similar-risk investment opportunities, you must earn an 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm’s value using several possible assumptions about the growth rate of cash flows.

a. What is the firm’s value if cash flows are expected to grow at an annual rate of 0% from now to infinity?

b. What is the firm’s value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity?

c. What is the firm’s value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity?

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
The price is based on these factors:
Academic level
Number of pages
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more