Written AssignmentWritten Problem 1:
At the end of 2015, Uma Corporation is considering undertaking a major long-term project in an effort to remain competitive in its industry. The production and sales departments have determined the potential annual cash flow savings that could accrue to the firm if it acts soon. Specifically, they estimate that a mixed stream of future cash flow savings will occur at the end of the years 2016 through 2021. The years 2022 through 2026 will see consecutive and equal cash flow savings at the end of each year. The firm estimates that its discount rate over the first 6 years will be 7%. The expected discount rate over the years 2022 through 2026 will be 11%. The project managers will find the project acceptable if it results in present cash flow savings of at least $860,000. The following cash flow savings data are supplied to the finance department for analysis.
a. Determine the value (at the beginning of 2016) of the future cash flow savings expected to be generated by this project.
b. Based solely on the one criterion set by management, should the firm undertake this specific project? Explain
c. What is the "interest rate risk," and how might it influence the recommendation made in part b? Explain.
End of year Cash flow savings 2016 $ 110,000.002017120,000.002018130,000.002019150,000.002020160,000.002021150,000.00202290,000.00202390,000.00202490,000.00202590,000.00202690,000.00Written Problem 2:
CSM Corporation has a bond issue outstanding at the end of the year. The bond has 15 years remaining to maturity and carries a coupon interest rate of 6%. Interest on the bond is compounded on a semiannual basis. The par value of the CSM bond is $1,000 and it is currently selling for $874.42.
a. Solve for the yield to maturity. Show your work.
b. Solve for the price of the bond if the yield to maturity is 2% higher. Show your work.
c. Solve for the price of the bond if the yield to maturity is 2% lower. Show your work.
d. What can you summarize about the relationship between the relationship between the price of the bond, the par value, the yield to maturity, and the coupon rate?