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.

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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