BUS 475 Finance Topics Answer Guide | June 2017

Which of the following alternatives will give the lowest present value?

• Receiving \$450 at the end of two years at an interest rate of 9% compounded
• Receiving \$650 at the end of three years at an interest rate of 10% compounded annually
• Receiving \$550 at the end of two years at an interest rate of 8% compounded annually
• Receiving \$500 at the end of three years at an interest rate of 11% compounded annually

Explanation: Here’s a breakdown of the PV for each option. You can use excel and the PV function to solve this problem.

 Rate FV Years PV 9% 450 2 \$378.76 10% 650 3 \$488.35 8% 550 2 \$471.54 11% 500 3 \$365.60

Tony holds 350 shares of a company’s stock. At the end of 2015, the market price of each share was \$32.

During the year 2016, the company pays \$2.25 in dividends per share. At the end of 2016, the company’s stock is priced at S39.50. Calculate the percentage return for holding the company’s stock during the year 2016. (Round the answer to one decimal place.)

30.5%

Explanation. First, find the dividend payout with 2.25 * 350 = 787.5. Second, find the total appreciation of shares with (39.5 – 32) * 350 = 2,625. Third add them together = 3,412.5.  Last, find the percentage change 3412.5 / 11,200 = 30.5%

Michael deposits \$35,000 today in his bank account. Calculate the approximate amount he will have at the end of six years if interest is 10% per year and is compounded semiannually.

62,860

Explanation: Use a basic compound interest calculator online or in Excel.

The current price of Latera Corporation’s common stock is \$45 per share.

The current price of Latera Corporation’s common stock is \$45 per share. The company expects to pay a dividend of \$3.30 per share during the next year. The expected growth rate of the stock is 12%. Calculate the cost of equity using the constant-growth model.

19.33%

Explanation: Cost of equity is calculated as follows: (dividends per share / current value of stock) + dividend growth rate

The capital structure of Wilken Corporation is given below. Calculate the weighted average cost of capital (WACC).

• Debt 35%
• Preferred stock 15%
• Common equity 50%

18.35%

Explanation: Recommended to use an online calculator to find WACC as it is a time consuming calculation to run manually.

Mark is expected to receive \$950 at the end of two years. Calculate the present value of this amount if the discount rate is 6%.

\$845.50

Explanation: If Mark receives \$950.00 in 2 years from now, that \$950.00 would be worth only \$845.50 today based on a discount rate of 6%.

Calculate the cost of preferred stock from the information given below:

• Annual dividend on preferred stock 13.50
• Price 110.00
• Flotation cost 6.00

12.98%

Explanation: The formula for preferred stock is Dividend on Preferred / (Price of Preferred – Flotation Costs).

• Student: Dimitri Bush
• Textbook: Variety
• Course: BUS 475 – 2017/18