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Evaluating Investment Opportunities

Consider the following situations and answer the related questions:

  • Your company has the opportunity to make an investment that promises  to pay $24,000 after 6 years. If your company has a required return of  8.5% on this type of investment, what is the maximum amount that the  company should pay for the investment? Explain your answer.
  • In the previous scenario, assume that your company negotiated a deal  where it would pay $12,000 for the investment and receive a payment of  $24,000 at the end of 7 years. What is the IRR on this investment?  Should the company make the investment? Explain your answer.
  • Another investment opportunity available to your company involves  the purchase of some common stock from Zorp Corporation. The company has  asked you to evaluate the stock, which paid a dividend of $4.25 last  year and is currently selling for $36 per share. If your company decides  to buy the stock, the stock will be held for 5 years and then sold. The  growth rate on the stock is constant at 3% per year, and your company’s  required return on the stock would be 11%. What is the maximum price  per share that your company should pay for the stock?
  • Zorp Corporation also has some bonds for sale that your company is  considering. These bonds have a $1,000 par value and will mature in 16  years. The coupon rate on the bonds is 5% paid annually, and they are  currently selling for $987 each. The bonds are call protected for the  next 4 years, and after this period, they are callable at 105. On the  basis of this information, answer the following questions:
    • What is the YTM on these bonds?
    • If the bonds are called immediately after the call protection period, what would be the yield to call (YTC)?
    • If the bonds paid interest semiannually instead of annually, would the YTC, the YTM, or both change? Explain your answers.

Submission Details:

  • Show the data used and the calculations for each question in a  Microsoft Excel sheet and write the analyses in a Microsoft Word  document.

 

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