Purchase Solution

Selling a Goldmine/Bonds

Not what you're looking for?

Ask Custom Question

Part I: Suppose you owned a goldmine. All of the gold will run out in two years, but your expected profits from the gold over the next two years are:

Year 1: $110,000 Year 2: $350,000
A. If the discount rate is 5% what is the present value of your profits at the end of Year 1 and Year 2?
B. With a discount rate of 7% how much would you be willing to sell your goldmine for now? Explain both your reasoning and your calculations
C. If you believed that Interest rates and inflation were going to go up during the next two years, would you want a higher price for your goldmine than your answer in B? Explain your reasoning
D. If your goldmine was located in an unstable third world country rather than the U.S., would you expect potential buyers to pay a higher or lower price for your goldmine?

Part II: Suppose you have a choice between two corporate bonds. Both of which will give you a payment of $1,000 in one year assuming that the corporation is able to meet its financial obligations. One is a bond from Pfizer Inc., the other is a bond from Sirius Satellite Radio.

Which of these two bonds would you pay a higher price for? i.e. which of these two corporations should have a lower discount rate?

Take into account such matters as the riskiness of each company, inflation, interest rate and any other factor that might affect the discount rate you would want from a bond from these firms.

YOU DO NOT have to do any calculations for Part II, just explain which bond you would be willing to pay a higher price for and justify your answer.

Turn in Parts I and II in one Word document. For Part I make sure you show all your work. Part II should be in the form of a two to three page paper explaining your reasoning.

Attachments
Purchase this Solution
Solution Summary

More than 900 words and all calculation shown.

Solution Preview

Please see the attached file.

FINANCE

Part I: Suppose you owned a goldmine. All of the gold will run out in two years, but your expected profits from the gold over the next two years are:
Year 1: $110,000 Year 2: $350,000
A. If the discount rate is 5% what is the present value of your profits at the end of Year 1 and Year 2?
Solution
Cash flow Discounting factor of 5% PV
110000 0.952 104761.9
350000 0.907 317460.3

B. With a discount rate of 7% how much would you be willing to sell your goldmine for now? Explain both your reasoning and your calculations
Solution
With the discount rate of 7%, the amount at which the goldmine can be sold now is the present value of the expected profits for the next two years.
Cash flow Discounting factor of 7% PV
110000 0.935 102803.7
350000 0.873 305703.6
408507.3
Value of sale = $408,507.3

C. If you believed that Interest rates and inflation were going to go up during the next two years, would you want a higher price for your goldmine than your answer in B? Explain your reasoning
Solution
If the interest rates and the inflation rates go up during the next two years then the discount rate will also increase, which in turn will reduce the NPV of the expected profits. So, this will reduce the profits or can say ...

Solution provided by:
Ashish Sharma, MBA (IP)
Education
  • MBA (IP), International Center for Internationa Business
  • BBA, University of Rajasthan
Recent Feedback
  • "Thank You so much! "
  • "Always provide great help, I highly recommend Mr. Sharma over others, thanks again. "
  • "great job. I will need another help from you. "
  • "first class!"
  • "Thank you for your great notes. Will you be willing to help me with one more assignment? "
Purchase this Solution
Free BrainMass Quizzes
Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce

Basics of corporate finance

These questions will test you on your knowledge of finance.

View More Free Quizzes
Related BrainMass Solutions

  • Accounting Law

    She also said that she had a few thousand dollars that she "would like to put in the business," as it seemed like it was going to be a "goldmine!" Lucy thought this was a great idea.

  • Define preferred stock and contrast it to common stock

    Your portfolio will probably receive a higher after-tax yield by investing in corporate bonds when rates are attractive enough or municipal bonds if you are in a higher tax bracket.

  • Bonds

    67995 Bonds 5. The Reynolds Corporation issued $1,000-thirty year bonds which pay $120 annually in interest. The bonds are currently selling par. a. What is the coupon rate? b. What is the current price of the bonds?

  • Explanation of Finance Questions: Bonds

    Discount bonds are not necessarily a good deal -- it depends on other factors as well, like the coupon rate of the bond and the interest rate curve. A bond selling at face is selling at 100, and a bond selling at premium is selling above 100.

  • Selling price of the bonds

    Instructions: As the controller of the company, determine the selling price of the bonds. The selling price of the bonds is the present value of interest and principal discounted at the market rate of interest.

  • Capital Structure Weights and Selling Security

    363685 Capital Structure Weights and Selling Security A. suppose taco bells equity is currently selling for $55 per share, with 4 million shares outstanding.

  • Bond - Selling price, amortization and retirement

    Bond issue costs were incurred in preparing and selling the bond issue. The bonds can be called by ABC at 101 at any time on or after March 1, 2006. Instructions: a.) Explain in your own words how the selling price would be determined. b.)

  • Convertible Bonds and YTM Issue

    The bonds have a conversion ratio of 40. When the bonds were issued the company's stock price was $14.50. Today (October 22, 2009) the stock price is $32.00 per share. A.

  • Estimating Value of Bond

    Bonds of similar risk are currently selling to yield a 10% rate of return. What is the value of these Marigold Merchants bonds? Is the bond selling at a discount or premium, and why?

View More Related Solutions