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Hi, I have 3 questions that I need help with: 1) A firm announced that it has just

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Question

Hi, I have 3 questions that I need help with:
1) A firm announced that it has just

uncovered two future investment opportunities. 

  • The first investment opportunity will require an investment in year 3 of $5 per share and will yield $1.00 per share in perpetuity starting in year 4. 
  • The second investment opportunity will require an investment in year 5 of $8.00 per share and will yield $1.50 per share in perpetuity starting in year 6. 

Assuming an interest rate of 10 percent, what is the effect of the announcement on today’s stock price? (i.e., how much, in dollars, will the stock price increase today due to the two new future investment opportunities?)

_______

2) A government bond matures in 7 years, makes annual coupon payments of 5.6% and offers a yield of 3.6% annually compounded.

a. Suppose that one year later the bond still yields 3.6%. What return has the bondholder earned over the 12-month period? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Rate of return  ____%

b. Now suppose that the bond yields 2.6% at the end of the year. What return did the bondholder earn in this case? (Do not round intermediate calculations. Enter your answer as a percent rounded 2 decimal places.)

Rate of return ____ %

3) Portfolio managers are frequently paid a proportion of the funds under management. Suppose you manage a $117 million equity portfolio offering a dividend yield (DIV1/ P0) of 6.7%. Dividends and portfolio value are expected to grow at a constant rate. Your annual fee for managing this portfolio is .67% of portfolio value and is calculated at the end of each year based on the beginning of year portfolio value. 

a. Assuming that you will continue to manage the portfolio from now to eternity, what is the present value of the management contract? Assume that the first payment to you as manager is based on today’s value of the equity portfolio and you receive it at the end of the year …. or effectively one year from today.  (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Present value   ____$  million

b. What would the contract value be if you invested in stocks with a 5.7% yield? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Contract value ____ $  million

 
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