Assignment 2: Course Project: Part 2
Your probationary period at the Cosmo K Manufacturing Group continues. Your supervisor, Gerry, assigns you a project each week to test your competence in finance.
This week, Gerry has asked you to evaluate several investment opportunities available to the company. Your instructions are to consider each situation independently of the others, unless otherwise indicated.
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.
- Show the data used and the calculations for each question in a Microsoft Excel sheet and write the analyses in a Microsoft Word document.
- Name your Microsoft Excel sheet MBA6010_W2_A2_LastName_
FirstName.xls and Microsoft Word document MBA6010_W2_A2_
- Submit your assignment to the W2 Assignment 2 Dropbox by Week 2, Day 6.
Assignment 2 Grading Criteria
Correctly identified the maximum amount that should be paid for the investment opportunity and explained how and why this conclusion was reached.
Correctly calculated the IRR for the second situation and made the correct recommendation, explaining why.
Correctly assigned a value to Zorp Corporation’s common stock and explained how the maximum price was determined.
Correctly identified the YTM and the YTC on Zorp Corporation’s bonds for annual and semiannual interest.
Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; and displayed accurate spelling, grammar, and punctuation.