Strayer FI360 – A best-selling author decides to cash in on her latest novel by selling the rights to the book

| June 2, 2016


Strayer University Virginia Beach campus FI360 Homework Questions

4-1: A best-selling author decides to cash in on her latest novel by selling the rights to the book’s royalties for the next six years to an investor. Royalty payments arrive once per year, starting one year from now. In the first year, the author expects $400,000 in royalties, followed by $300,000, then $100,000, then $10,000 in the three subsequent years. If the investor purchasing the rights to royalties requires a return of 7% per year, what should the investor pay?

4-12: Bennifer Jewelers recently issued ten-year bonds that make annual interest payments of $50. Suppose you purchased one of these bonds at par value when it was issued. Right away, market interest rates jumped, and the YTM on your bond rose to 6%. What happened to the price of your bond?

[Chapter 5: Problems 5-1, 5-4, and 5-9]

5-1: Argaiv Towers has outstanding an issue of preferred stock with a par value of $100. It pays an annual dividend equal to 8% of par value. If the required return on Argaiv preferred stock is 6%, and if Argaiv pays its next dividend in one year, what is the market price of the preferred stock today?

5-4: Suppose a preferred stock pays a quarterly dividend of $2 per share. The next dividend comes in exactly one-fourth of a year. If the price of the stock is $80, what is the effective annual rate of return that the stock offers investors?

5-9: Gail Dribble is analyzing the shares of Petscan Radiology, Petscan’s stock pays a dividend once each year, and it just distributed this year’s $0.85 dividend. The market price of the stock is $12.14. Gail estimates that Petscan will increase its dividends by 7% per year forever. After contemplating the risk of Petscan stock, Gail is willing to hold the stock only if it provides an annual expected return of at least 13%. Should she buy Petscan shares or not?

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