Question -

Q1. Assume that you have tried to save $2000 per year in an IRA (Individual Retirement Account) for the past 20 years and have earned an average of 11%.  However, due to the purchase of a new home and some other expenditure, you were unable to make any contributions to the retirement account in years 8, 9, and 10.  How much would you have in your IRA at the end of your working career, i.e., t=20?

Q2. Calculate the weighted average cost of capital for the Luxury Porcelain Company.  The book value of Luxury's outstanding debt is $60 million.  Currently, the debt is trading at 120 percent of book value and is priced to yield 12%.  The 5 million outstanding shares of Luxury stock are selling for $20 per share. The required return on Luxury's stock is 18 percent. The tax rate is 25 percent.

Q3. A 20-year maturity 9% coupon bond paying coupons semiannually is callable in 5 years at a call price of $1,060.  The bond currently sells at a yield to maturity of 7%.  What is the yield to call?

Q4. Consider a pharmaceutical firm that is developing a new drug that it expects will have a significant effect.  The firm has anticipated that the cash flows from this drug will begin at t=11 after FDA approval and continue for 15 years.   Assume further that the cash flows beginning at t=11 will equal $1,800,000 per year and will remain constant for fifteen years.  Assuming that the firm wishes to earn a minimum of 16%, what would be the present value as of today, t=0, of these cash flows?

Q5. Why would someone with only $275,000 available, purchase one share of Berkshire-Hathaway stock which is currently priced at around $274,750 per share when they could easily purchase far more shares of IBM which is selling for around $152.03 per share? Explain.