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Also, if the product goes over $50 million in cumulative sales by the end of year 15, he will receive an additional $1,500,000. Rambo thought there was a 75% probability this would happen. Offer II - 25% of the buyer's gross margin for the next 4 years. The buyer on this case is Air Defense, Inc. (ADI). Its gross margin is 65 percent. Sales for year 1 are projected to be $1 million and then grow by 40% per year. This amount is paid today and is not discounted. Offer III - A trust fund would be set up for the next nine years. At the end if that period, Rambo would receive the proceeds (and discount them back to the present at 12%). The trust funs called for semiannual payments for the next 9 years of $80,000 (a total of $160,000 per year). The payments would start immediately. Since the payments are coming at the beginning of each period instead of the end, this is an annuity due. To look up the future value of the annuity due in the tables, add 1 to n (18 +1) and subtract 1 from the value in the table. Assume the annual interest rate on this annuity is 12% annually (6% semiannually). Determine the present value of the trust fund's final value. Required: Find the present value of each of the three offers and then indicate which one has the highest present value. You must show your work and show the tables. Offer I PV = $1,090,263.89 Offer II PV = $1,154,400 Offer III PV = $945,086.51 Offer II has the highest PV – Calculations are on the attached excel sheet Chapter 10 #1 P.306 The Lone Star Company has $1,000 par value bonds outstanding at 9 percent interest. The bonds will mature in 20 years. Compute the current price of the bonds if the present yield to maturity is: a. 6 percent. Present Value of Interest Payments PVA = A * PVIFA (n = 20, I = 6%) Appendix D PVA = 90 * 11.470 = $1,032.30 Present Value of Principal Payment at Maturity PV = FV * PVIF (n = 20, I = 6%) Appendix B PV = 1,000 * .312 = $312 Total Present Value Present Value of Interest Payments $1,032.30 Present Value of Principal Payments 312.00 Total Present Value or Price of the Bond $1,344.30 b. 8 percent. PVA = A * PVIFA (n = 20, I = 8%) Appendix D PVA = $90 * 9.818 = $883.62 PV = FV * PVIF (n = 20, I = 8%) Appendix B PV = $1,000 * .215 = $215 $ 883.62 215.00 $1,098.62 12 percent PVA = A * PVIFA (n = 20, I = 12%) Appendix D PVA = $90 * 7.469 = $672.21 PV = FV * PVIF (n = 20, I = 12%) Appendix B PV = $1,000 * .104 = $104 $672.21 104.00 $776.21 Chapter 10 #6 P. 306/307 The Hartford Telephone Company has a $1,000 par value bond outstanding that pays 11 percent annual interest. The current yield to maturity on such bonds in the market is 14 percent. Compute the price of the bonds for these maturity dates: a. 30 years. PVA = A * PVIFA (n = 30, i = 14%) Appendix D PVA = $110 * 7.003 = $770.33 PV = FV * PVIF (n = 30, i = 14%) Appendix B PV = $1,000 * 0.02 = $20 $770.33 20.00 $790.33 b. 15 years. PVA = A * PVIFA (n = 15, i = 14%) Appendix D PVA = $110 * 6.142 = $675.62 PV = FV * PVIF (n = 15, i = 14%) Appendix B PV = $1,000 * .140 = $140 $675.62 140.00 $815.62 1 year. PVA = A * PVIFA (n = 1, i = 14%) Appendix D PVA = $110 * .877 = $96.47 PV = FV * PVIF (n = 1, i = 14%) Appendix B PV = $1,000 * .877 = $877.00 $ 96.47 877.00 $973.47 Chapter 11 #5 P. 350 The Goodsmith Charitable Foundation, which is tax-exempt, issued debt last year at 8 percent to help finance a new playground facility in Los Angeles. This year the cost of debt is 20 percent higher; that is, firms that paid 10 percent for debt last year would be paying 12 percent this year. a. 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