# Finance Paper

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Submitted By pillo
Words 1865
Pages 8
Part A: PROBLEM-SOLVING QUESTIONS (Answer all FOUR questions). This assignment is 20% of the total mark.

1. Suppose a 10-year, \$1000 bond with an 8% coupon rate and semiannual coupons is trading for a price of \$1034.74.
(10 Marks)

a. What is the bond’s yield to maturity (expressed as an APR with semiannual compounding)?

CPN = PMT = \$40 = 1000/2*0.08
P = \$1034, 74
N = 20
FV = \$1000
Using

Therefore y = 3,75
And APR = 7.5%

b. If the bond’s yield to maturity changes to 9% APR, what will the bond’s price be?

Using the formula above with y=4,5
P= \$934,96
I don’t see the need of including the excel file as it is simple calculations

2. FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is \$200,000 per year. Once in production, the bike is expected to make \$300,000 per year for 10 years. Assume the cost of capital is 10%.
(10 Marks)
a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment?
As the cash flows occur at the end of the year, being t the year we are calculation for the cash flow (R), when t=0 R=0. From t=1 to t=6, R=-200000\$. After that, from t=7 to t=16, R=+300000\$. Cost of capital, I, is 10%
We need to use the Net Present Value decision rule.

Using that formula in excel, NPV = \$169482
As it is positive, the company should enter the investment. It would be like having an extra \$170K in their cash today.
b. By how much must the cost of capital estimate deviate to change the decision? (Hint: financial calculator to calculate IRR.)
As the cost of capital change, the profitability of the investment varies. We need to calculate the IRR (internal rate of return) which is when the NPV = 0.
Plotting the values in excel and using the IRR formula:

The cost...

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