The Book’s Royalties
Chapter 4: Problems
4-1- A best-selling author decides to cash in 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?
Year 1 PV= $373, 831.78 ($400,000=FV, 7%= I, 1=n)
Year 2 PV= $262, 031.62 ($300,000=FV, 7%= I, 2=n)
Year 3 PV= $81, 629.79 ($100,000=FV, 7%= I, 3=n)
Year 4 PV= $7, 628.95 ($10,000=FV, 7%= I, 4=n)
Year 5 PV= $7, 129.96 ($10,000=FV, 7%= I, 5=n)
Year 6 PV= $6, 663.42 ($10,000=FV, 7%= I, 6=n)
PVs= $738, 915.52. The investor should pay nothing more than the present value of the payments
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 board rose to 6%. What happened to the price of your bond?
The price fell by $73.60.
Chapter 5: Problems
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 of 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?
$8/0.06= $133.33