Desdam
Jul 18, 2010, 01:24 PM
1. You have been offered a job with an unusual bonus structure. As long as you stay with the firm, you will get an extra $70,000 every seven years, starting seven years from now. What is the present value of this incentive if you plan to work for the company for a total 42 years and the interest rate is 6% (EAR)?
2. Suppose that General Motors Acceptance Corporation issued a bond with ten years until maturity, a face value of $1,000, and a coupon rate of 7% (annual payments). The yield to maturity on this bond when it was issued was 6%. Provide answers to the following problems:
a. What was the price of this bond when it was issued? Show calculations.
b. Assuming the yield to maturity remains constant, what is the price of the bond
immediately before it makes its first coupon payment?
c. Assuming the yield to maturity remains constant, what is the price of the bond
immediately after it makes its first coupon payment? (Points :40)
3. You are considering making a movie. The movie is expected to cost $10 million upfront and take a year to make. After that, it is expected to make $5 million in the year it is released and $2 million for the following four years. What is the payback period of this investment? If you require a payback period of two years years, will you make the movie? Does the movie have a positive NPV if the cost of capital is 10%? Show detailed calculations when answering the problem.
2. Suppose that General Motors Acceptance Corporation issued a bond with ten years until maturity, a face value of $1,000, and a coupon rate of 7% (annual payments). The yield to maturity on this bond when it was issued was 6%. Provide answers to the following problems:
a. What was the price of this bond when it was issued? Show calculations.
b. Assuming the yield to maturity remains constant, what is the price of the bond
immediately before it makes its first coupon payment?
c. Assuming the yield to maturity remains constant, what is the price of the bond
immediately after it makes its first coupon payment? (Points :40)
3. You are considering making a movie. The movie is expected to cost $10 million upfront and take a year to make. After that, it is expected to make $5 million in the year it is released and $2 million for the following four years. What is the payback period of this investment? If you require a payback period of two years years, will you make the movie? Does the movie have a positive NPV if the cost of capital is 10%? Show detailed calculations when answering the problem.