NCE 4103 - ENGINEERING ECONOMICS 2022

1. Jazz Recording Company’s preferred stock is currently selling at 1000.00 per share.
If each share is guaranteed an annual dividend of P85.00, determine the rate of
return realized from a Jazz stock investment.

Solution:
¿=85
P=1000
85
Ip= ¿ =
P 1000
Ip=0.085∨8.5 %

2. Determine the cost of capital if a company if it sells P500.00, 10% dividend

preferred stocks at 7.5% discount.

Solution:
¿=10 %
Discount=7.5 %
0. 10
Cost of Capital= =0.1081∨10.81 %
1−0.075
3. The preferred stock for ironhide Steel Corporation guarantees annual dividends of
P50.00 per share. If an investor desires a rate return of 10% for his investment, how
much should he be willing to pay for a share of ironhide stock?

Solution:
¿=50
Ip=10 %
D ⅈv 50
I P= 0.10=
P P
P=500

4. To raise P50M for its Expansion projects barricade security industries it's assuring
125,000 shares of prepared stock. PPH share is guaranteed an annual dividend of
P32.00, determine a) the par value of the stock; b) the cost of capital for the
company.

Solution:
50,000,000 ¿
P50M a.) =400 b.) Ip= P
125,000
32
125,000 P=400 Ip=
400
Div = 32.00 Ip=0.08∨8 %
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NCE 4103 - ENGINEERING ECONOMICS 2022

5. Determine the expected rate of return for a Stark Industries Common stock that is
currently priced at 95 pesos. Annual dividends of 4.75 per share have been paid
regularly and a growth rate of 5% is projected.

Solution:
¿=4.75
P=95
g=5 %
Ic= ¿ = 4.75
P+ g 95+5 %
Ic=0.1∨10 %

6. Common stocks for daily planet advertising and News Corp just paid dividends of
11.50 per share. This is 1.50 higher than last year's dividend payment. Assuming
the growth rate remains constant, determine the dividend payment three years from
now.

Solution:
Divo=11.50
1.50 higher than last year therefore ,last year ÷¿ 10
11.50
Growth rate=
10−1
Growth rate=15 %
Dn=Do (1+ g )n
3
¿ after 3 years=11.50 ( 1+0.15 )
¿ after 3 years=17.49

7. A company that is currently enjoying a 12.5% growth rate expects to pay dividends
of 4.50 per share for its common stock offerings. If the estimated cost of capital for
the company is 20%, determine the price for which the stocks should be offered.

Solution:
Div = 4.50
g=12.5%
Ic=20 %
4.50
0.20=
P=0.125
P=60
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NCE 4103 - ENGINEERING ECONOMICS 2022
8. Two years ago, the initial public offering for a share of Wayne industries common
stock was 75 .00. Last year, an investor computed a rate of return of 15% after
receiving dividends of 6.00 per share. Assuming a constant growth rate, determine
the dividends to be paid this year.

Solution:
Ic=15 %
¿=6
P=75

15 %= ( 756 )+ g
G=7 %
¿ 1=¿ 0 ( 1+0.07 )÷1=P 6.42

9. The table below shows the market performance for a share of common stock any
multi-national corporation.

Date Price Dividends Paid

January 24, 2005 60.00 5.00
January 24, 2006 63.00 5.50
January 24, 2007 67.00 6.05
January 24, 2008 74.00 7.49
if an investor purchased shares on January 24, 2005, determine the rate of return
realized for a 2-year holding period.

Solution:
P=¿ 0 ( 1+ g ) ( 1+ Ic )−1+¿ 1 (1+ g )( 1+ Ic )−2+ R ( 1+ Ic )−2
60=5.00 (1+10 % ) (1+ Ic ) 1+5.50 (1+10 % ) ( 1+ Ic ) −2+67 ( 1+ Ic )−2 Ic
¿ 0.150∨15 %

10. Same as problem no. 09, except that the holding period Is until January 24, 2008.

Solution:
¿ 4=¿ 3 ( 1+ g ) 3
7.49=6.05 ( 1+ g ) 3
g=7.376 %
I= ¿ +g
P
7.49
I= +7.376 %
74
I =17.4 %

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 NCE 4103 - ENGINEERING ECONOMICS 2022
11. With reference to problem no.09, on January 24, 2009 the stock price plunges to
62 .00 with a 3.00 dividend paid per share. determine the rate of return for the 4-
year holding period.

Solution:
60=5 (1+ Ic ) −1+ 5.50 ( 1+ Ic )−2+ 6.05 ( 1+ Ic )−3+ 7.49 ( 1+ Ic )−4+ ( 3+62 )( 1+ Ic )−5
Ic=10 %

12. Cyclops Visor Corporation just issue dividends off 25.00 for a share of its common
stocks. The current price of a share is 800.00. if a Cyclops stock has an annual
growth rate of 10%, determine its market value after three years for an investor to
realize a 20% rate of return.

Solution:
¿=25
g=10 %
Ic=20 %
P=800
−1 2 −2 3 −3 −3
800=25 ( 1.1 )( 1.225 ) +25 ( 1.1 ) ( 1.2 ) + ( 1.1 ) ( 1.2 ) + R ( 1.2 )
R=P 1,273.225
13. Based on a company’s 5.00 dividend payments and estimated future value of
200.00 per share after two years, an investor bought common stocks at 155.00 per
share. Determine the growth rate for the investor to realize a rate of return of 17%.

Solution:
155=5 ( 1+ g ) ( 1.17 ) −1+5 ( 1+ g ) 2 (1.17 )−2+200 ( 1.17 ) −2
g=8.177 %

14. Common stocks for Starscream Rocket Corporation just paid 15.00 dividends per
share. The company’s financial records indicate a constant growth rate of 9%.
Determine the current market price, if an investor computed an 18% rate of return
based on the speculation that the price will increase by 50% three years from now.

Solution:
¿=15 , g=9 % , Ic=18 %
R=P ( 1.5 )
−2 −3
−1 2 ( 1.18) 3 ( 1.18 ) −3
P=15 ( 1.09 ) ( 1.18 ) +15 ( 1.09 ) +15 ( 1.09 ) + ( P (1.5 ) ) ( 1.18 )
P=442.0028

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 NCE 4103 - ENGINEERING ECONOMICS 2022
15. EE Board Exam April 1997
1000.00 face-value bond pays dividends of 110.00 at the end of each year. If the
bond matures in 20 years, what is the approximate bond value at an investment rate
of 12% compounded annually?

Solution:
Face Value=1000
¿=110
n=20 years
Investment rate=12 %
Price of Bond=110(1−(1.12)−20/0.12)+1000/1.1220
Price of Bond=P 925.31

16. EE Board Exam October 2004

A bond with a par value of 1000.00 and with a bond rate of 9% payable annually is
to be redeemed at 1050.00 at the end of 6 years. If it is sold now, what should be
the selling price the yield 8%?

Solution:

Annual coupon= ( 1009 )∗1000=90

periods periods
Price=Coupon∗[1−1/(1+rate) ]/ rate+ Future value/(1+rate)
Price=90∗[1−1/(1+0.08) 6]/0.08+1050 /(1+0.08)6
90∗[ 1−0.63017 ]
Price= + 661.67811
0.08
Price=90∗4.62288+661.67811
Price=P 1,077.74

17. A 1000.00, 14% bond will mature in eight years. If interest is to be paid quarterly,
find the price to realize a yield to maturity of 12.55%.

Solution:

−n (( 1+i )n−1 )
P=F ( 1+i ) + Fr ( )
i ( 1+i )n

P=1000 ( 1+0.30 )
−32
+1000 ( 3.5 % )
(
(1+ 0.30 )32−1
0.30 ( 1+0.30 )
32 )
P=P 1101.94

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 NCE 4103 - ENGINEERING ECONOMICS 2022
18. A bank offers 8% interest compounded quarterly. Determine he required selling
price for a 10,000.00, 8-year, 7% convertible bond that pays interest every three
months if an investor wants to realize the same rate of return from the purchase.

Solution:

Coupon= ( 0.074 )∗10,000=175

Interest rate=2% quarterly n=8 years=32 quarters

175 172 172 172

Price= + + +… … .
1.02 ( 1.02 ) ( 1.02 )
2 3
(1.02 )32
Price=P 9,413.29

19. Same as problem no.18, expect that the bond pays interest every six months.

Solution:
Coupon=Coupon Rate /(2) × Face Value=7 % /2× 10,000=350
Effective Rate per quarter=2 %
Effective Rate per semi annual period=( 1+ Effective Rate per quarter ) N −1
Effective Rate per semi−annual period=(1.02)2−1
Effective Rate per semi−annual period=4.04 %

Price=Coupon∗ ( 1−( 1+r )−16

r
+ )(
Face Value
( 1+r )n )
350∗[ 1−( 1.0404 ) ]+
[ ]
−16
10,000
Price=
0.0404 ( 1.0404 ) 16
Price=4066.30+5306.33
Price=P 9,372.63

20. ECE Board Exam April 1995 and April 2000

A man wants to make 14% nominal interest compounded semi-annually on a bond
investment. How should the man be willing to pay now for a 12%-10,000.00 bond
that will mature in 10 years and pays interest semi-annually.

Solution:

( 1+i )n−1 r i
P= (1+i )−n + Fr ; r = =6 % , n=n ( 2 )=20 , i= =7 %
i ( 1+i )
n
2 2

−20 ( (1+ 0.07 )20−1 )

P=10 , 000 ( 1+0.07 ) +10,000 ( 0.06 )( )
( 0.07 )( 1+0.07 )20
P = 8, 940.60

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NCE 4103 - ENGINEERING ECONOMICS 2022
21. A 5000.00 debenture bond that mature in 10 years pays 150.00 every three months.
If a n investor who bought the bond computed a nominal return of 10%
compounded quarterly, determine a) the Bond rate; b) the bonds purchased price.

Solution:
a.) Annual coupon=150∗4=300
300
Bond rate=
50000∗100
Bond rate=12 %

b.) n=10∗4=40
Semi−annual rate=10 % /4=2.5 %
Price of bond=150∗(1−1)/(1+0.025) 40 ¿/0.025+¿
150∗1−0.37243
Price of bond= +1862.15312
0.025
Price of Bond=P 5,627.57
22. EE Board Exam October 2001
A bond with a par value of 1000.00 will mature in 7 years with a bond rate of 8%
payable annually. It is to be redeemed at par at the end of this period. If it is sold at
1050.00, determine the yield at this price.

Solution:
Face Value=1000
Coupon Payment=1000∗8 %=80
Selling Price=1050
Time of Maturity=7 years

YTM =(80+(1000−1050)/7) /(1000−1050)/2 ¿

YTM =7.07 %

23. To raise capital for an expansion project, Pegasus Motors Corporation issue
5000.00, 8% bonds. The bonds will mature in 5 years with interest paid every year
three months. If an investor purchased 12 certificates for 48,000.00. Determine: a).
the total quarterly receipts due; b) the current yield of the bond.

Solution:

Annual interest rate on bond=8 % b . ¿ Current Yield= ( 1200∗4

48000 )
∗100

Quarterly rate=0.08 / 4=0.02 Current Yield=10 %

a.) Total quarterly receipts=12∗5000∗0.02
Total Quarterly Receipts=P 1,200
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NCE 4103 - ENGINEERING ECONOMICS 2022
24. A 10,000.00 bond that pays 300.00 quarterly matures in five years. Determine the
discount of premium to be offered an investor who desires a yield of 14% to maturity.

Solution:
Face Value=10000
Coupon=300 per quarter
n=5 years=20 quarters
YTM =14 % per annum

14 %=(1+r )4−1
r =3.33 %
Price of bond=300(1−(1.0333)−20)/0.0333+1000091.0333 ¿−20
Price of Bond=9,523.7
Discount=10,000 – 9,523.7
Discount=P 476.3

25. A 10,000.00, 8-year, 7% bond that pays interest semi-annually is offered at 5%

discount. Determine its redemption price if an investor is to realize a yield of 10%
semi-annually.

Solution:
Face Value=10000
n=8 years=16 semi−annual period
YTM =10 % per annum=5 % per semi−annual period
Coupon=( 10000∗0.07)/2=350
Price of bond=10000−(10000∗0.95)=9,500
9500=350(1−(1.05)−16)/0.05+ Redemption Price(1.05)−16
Redemption Price=P 12,457.19
26. A very stable and solvent company issued 10,000.00, *% debenture bonds for
10,700.00. if the bond pays interest yearly and will mature in 10 years, determine: a).
the current yield; b). the yield to maturity.

Solution:
Face Value=10000
10700=10000(1+r )−10+10000(0.08)(1+r ) 10−1/r (1+r ) 10
Coupon Payment=10000∗8 % YTM =7 %
Selling Price=10700
n=10

Current Yield= ( 10700

800
)∗100
Current Yield=7.48 %
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NCE 4103 - ENGINEERING ECONOMICS 2022

27. A 1000.00, 6-year, 12% bond is offered with a premium of 80.00. if interest is
payable semi-annually, determine a) the current yield; b) the yield to maturity.

Solution:
Face Value=1000
n=6 years=12 periods
Coupon=1000∗12% /2=60
Price of Bond=1000+80=1080
Current yield=( 2∗60)/1080
Current Yield=11.11%

60 ( 1− (1+r )−12 )
1080= + 1000 ( 1+r )−12
r
r =5.0925 %
YTM =(1+ 0.50925) 2−1
YTM =10.44 %

28. A 10,000.00, 5-year, 10% bond is offered with a discount of 250.00 if the bond pays
interest quarterly, find a) the current yield; b) the yield to maturity.

Solution:
Face Value=10000
n=5 years=20 quarters
Couponrate=10 %
10000∗10 %
Quarterly Coupon= =250
4
Current Bond Price=10000−250=9750
Current Yield=(4∗250)/9750
Current Yield=10.26 %

9750=250(1−(1+r )−20)/r +10000(1+r )−20

r =2.663 %
YTM =(1+ 0.02663) 4−1
YTM =11.07 %

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NCE 4103 - ENGINEERING ECONOMICS 2022
29. A 5000.00, 10-year,8% bond that pays interest annually was purchased four years
ago with a discount of 152.00. if the bond is sold today for 4750.00, determine a)
the rate of return realized by the owner; b) the rate of return realized by the
purchaser if he holds on to the bond until maturity.

Solution:
Rate of Return 5000−152=4848
4750+ 400=5150

0=NPV =−4848+
400
1+ IRR(+
400
)(
( 1+ IRR ) 2
+
400
( 1+ IRR ) 3)(
+
5150
(1+ IRR ) 4 )( )
IRR=7.8 %

5000+ 400=5400

0=NPV =−4848+ ( 1+400IRR )+( ( 1+400IRR ) )+( ( 1+400IRR ) )+( ( 1+400IRR ) )+( ( 1+400IRR ) )+( ( 1+400IRR ) )+( (1+400IRR
2 3 4 5 6

IRR=8.46 %
30. EE Board Exam October 1986
A 1000,000.00 issue of 3%, 15-year bonds is sold at 95%. The miscellaneous initial
expense of the financing was 20,000.00 and yearly expenses of 2000.00 is incurred.
What is the true cost the company is paying for the money it borrowed?

Solution:
Issue Price=1,000,000∗95 %=950,000
Coupon Payment=3 %∗1,000,000=30,000
(15) (15−1)
(950,000 – 20,000)(1+i) =32,000((1+i) /i)+ 1,000,000
i=0.038=3.8 %
31. Ruby Corporation is offering 10,000.00, 8% bonds that pays interest quarterly for
8500.00. Jade Corporation is offering 10,000.00, 12% bonds that pay interest semi-
annually at face value. If both bond offerings will mature in five years, determine the
better offer.

Solution:
( 1+i ) 20−1
8,500=10,000 (1+i )−20+(10,000)(0.02){ }
( i∗( 1+i ) 20 }
i=0.03 ; ieR=(1+i) m−1=(1+0.03)4−1=0.1255∨12.55 %

10,000=10,000 (1+ i)−10+(10,000)(0.045){((1+ i)10−1)/¿

i=0.045 ;ieJ=(1+i)2−1=0.0920∨9.2%

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