Corporate Finance Tute-2 1. You are contemplating buying a pension policy. Your financial advisor tells you that to buy the pension policy, you have to pay (or contribute to) the pension fund an amount that is constant in real terms every year, starting 1 year from now, for the next 30 years (i.e. until and including the year 2039). In return, the pension fund provider shall pay an annual pension to you for the subsequent 30 years (i.e. starting in the year 2040) that is constant in real terms. Assume a long-term nominal interest rate of 6% per year. With your current standard of living (which you would want to retain once you retire), you expect that you would need Rs. 240,000 per year in real terms as pension. Assume that the average long-term inflation rate is expected to be 4.8% per year. Calculate how much you would thus need to save every year in real terms (to contribute to the pension fund) in order to meet your needs?

2. Raj Corporation has the opportunity to invest $ 1 million now (t=0) and expects after tax return of $600000 in t=1 and $700000 in t=2. The project will last for 2 years only. The appropriate cost of capital is 12% with all equity financing. The borrowing rate is 8% and Raj Corporation will borrow $300000 for the project. The debt must be repaid in two equal instalments. Assume that debt tax-shields have a net value of $0.30 per dollar of interest paid. Calculate the project’s APV.

3. The following table shows the price of a sample of US treasury strips in March 2009. Each strips make a single payment of $1000 at maturity. Maturity | Price (%) | March 2010 | 99.423 | March 2011 | 97.546 | March 2012 | 94.510 | March 2013 | 90.524 |

a) Calculate the annually compounded spot interest rate for each year. b) What will be the price of the bond in year March 2011, which have maturity in March 2013 which make