Home » FINA 2100-FINA 2100 Homework #4-c net profit of $46,000 for the next 3 years.

FINA 2100-FINA 2100 Homework #4-c net profit of $46,000 for the next 3 years.

FINA 2100 Homework #4Name:_____________________Show your work*** (add pages as needed).***show data in formulas or note what data was used for necessary calculator inputs.1. c net profit of $46,000 for the next 3 years. At theend of year 4 you will liquidate the business and receive a terminal value of $110,000 (this is the annualnet profit for that year plus liquidation proceeds). Total income in this scenario is $248,000.You are considering the sale of your business and have several options. However, you are not sure if itmakes sense. You may be better off financially if you keep it. If you do sell, you intend to reinvest anyproceeds into a new business venture where you expect to earn a 20% rate of return (This is yourrequired rate of return since it is your best alternative investment option.).You have received the following offers:Buyer A offers to pay you $240,000. She will pay you $80,000 annually for 3 years.Buyer B offers $175,000 and he is willing to pay you in one immediate, upfront payment.Buyer C offers $225,000 and she will make the full payment at the end of year 2.Assume annual compounding and that all income or payments are received at the end of each indicatedyear and are given in “after tax” dollars. Also, assume there is no credit risk in any scenario -all paymentsare guaranteed.a. Calculate the present value of keeping the business (show your work);b. Compute the economic value to you of each buyer’s offer (show your work); andc. Rank the offers in terms of economic value. Should you sell the business? If so, which offer shouldyou select?Note: This is a basic Present Value problem where you are determining the economic value of your business usingseveral optional cash flow scenarios.FINA 2100 Homework #42. You manage the investment portfolio of a local credit union. You are evaluating the purchase of thefollowing bond:ABC Corporation 6% Coupon due 5/15/20186% coupon is paid semiannually (3% of par every 6 months). Assume this is a new issue and today’s date isexactly 2 years before the maturity date and you will purchase $5,000,000 in par value.This bond is priced based on a spread to US Treasuries yields. The benchmark US Treasury note for thisbond is 4% and the spread is 400 basis points (100 basis points (bps) = 1%). So, 400 bps = 4%).Answer the following and show your calculations and/or calculator inputs:a. How many interest payments will you receive?b. What is the dollar amount of each semiannual interest payment (assuming $5 million par)?c. What is the market yield (purchase yield) for this bond (UST Yield + Spread)?d. Assuming you purchase $5 million par at the market yield, what is the present value of the futureprincipal and interest payments from this investment?e. How is this present value expressed as a “price” in the bond market?f.Calculate 4 additional pricing data points: What are the prices of this bond if rates (market yields)rise or fall by 100 and 200 basis points (1% or 2%) immediately after you purchase the bond?g. Input the 5 price data points you calculated into a graph where the Y axis is the bond’s Price andthe X axis is the market yield.Note: This is a basic Present Value problem where you are determining the economic value (price) of a bond (aseries of contractual cash flows) under a range of required rates of return (market yields).FINA 2100Assignment #4Page 2

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