MF620 Discussion Question 3-1

DISCUSSION QUESTION 3-1

MF620: Financial Statement Development and Analysis

 

Lesson 3: Assessing Future Financial Needs

 

 

Upon completion of the Required Readings, write a thorough, well-planned narrative answer to the following discussion question.  Rely on your Required Readings and the Lecture and Research Update for specific information to answer the discussion question, but turn to your original thoughts when asked to apply, evaluate, analyze, or synthesize the information.  Your Discussion Question response should be both grammatically and mechanically correct, and formatted in the same fashion as the question itself.  If there is a Part A, your response should identify a Part A, etc.  In addition, you must appropriately cite all resources used in your responses and document in a bibliography using APA style.

 

Discussion Question 1 (50 points)

Calculate the following:

 

1.                     Calculate the present value (PV) of a cash inflow of $500 in one year and a cash inflow of $1,000 in five years, assuming a discount rate of 15 percent.

 

2.                     Calculate the present value (PV) of an annuity stream of five annual cash flows of $1,200, with the first cash flow received in one year, assuming a discount rate of 10 percent.

 

3.                     What is the present value of a perpetual stream of annual cash flows, with the first cash flow of $100 to be received in one year and with all subsequent cash flows growing at a rate of 3 percent, assuming a discount rate of 8 percent?

 

4.                     Consider two bonds, Bond C and Bond D, both with a yield to maturity of 10 percent and with 5 years to maturity. These are standard bonds with semiannual coupon payments. Bond C has a coupon rate of 10 percent (with semiannual coupon payments); Bond D does not pay any coupons (i.e., it a zero-coupon bond). What is the price of each bond?

 

5.                     What is the fair value today of a common share with expected annual dividends of $1.00, $1.05, and $1.10 in each of the next three years and an expected share price of $20 in three years, assuming a required return of 9 percent?