Part A)
Blackburn & Smith's shares currently sell for $2.30 per share. The
company's executives anticipate a constant growth rate of 10.5% and an
end-of-year dividend of 25 cents.
1) what is your expected rate of return?
2) If you require a 17% return, should you purchase the shares?
Part B)
An issue of treasury bonds with a par value of $1,000 matures in 14
years and pays 9% interest annually. The market price of the bonds is
$1,100 and your required rate of return is 10%.
1) Computer the bond's expected rate of return.
2) Determine the value of the bond to you, given your required rater of return.
3) Should you purchase the bond?
Part C)
Gree's preference shares are selling fore $3.50 in the market and pay
40 cents dividend.
1) What is the expewcted rate of return on the shares?
2) If an investor's required rate of return is 10%, what is the value
of the share for that investor/
3) Should the investor acquire the shares?
Part D)
John will retires in 6 years. He has $50,000 to invest, and he wants
to open a small business that can be managed in the free time he has
available from his regular occupation, but can be closed easily when
he retires. He is considering laundromat.
After careful study, Mr Wong has determined the following:-
a) Equipments needed cost $48,000. In addition, $2000 in working
capital investment would be required to purchase an inventory of soap,
bleaches and related items. The soap, bleaches and related item would
be sold to customer at cost. After 6 years, the working capital would
be released for investment elsewhere.
b) The laundromat would charge 50 cents per use for the washers and 25
cents per use for the dryers. (A regular wash cycle is 20 mins, and a
regular dryer cycle is 15 mins) John expects the laundomat to gross
$600 per week from the washers and $375 each week from the dryers.
c) The only variable costs in the laundromat would be 7.5 cents per
use for water and electrocity for the washers and 9 cents per use for
gas and electricity for the dryers
d) Fixed costs would be $1000 per month for rent, %500 per month for
cleaning and $645 per month for maintenance, insurace and other items.
e) The equipment would have a 10% disposal value in 6 years.
john will not open the launcromat unless it provides at least a 12%
return, since this is the amount that he could earn from an
alternative investment opportunity.
Required: (ignore income taxes)
1) Assuming tha the laundromat would be open 52 weeks a year,
calculate the expected net annual cash receipts from its operation.
Show calculations using the net present value method of investment
analysis. Round all dollar amounts to the nearest whole dollar.
2) Would you advise John to open laundromat? |
