homework

what is the relationship between bond pricing and interest rate?

inverse relationship

Your broker offers to sell for $1150 an AAA rated bond with a coupon rate of 6 percent and a maturity of 8 years. Given that the interest rate on com is 4 percent is your broker fairly pricing the bond?

1134.65. not fairly priced

The fertilizer will require a new factory that can be built at a cost of $81.6 million. Estimated return on the new fertilizer will be $28 million in the first year, and last four years. The cost of capital is 10%, what is the NPV of this new factory?

7.16

What is a high-yield bond?

A "junk bond" has high yield because it holds high ...

A corporation issues a bond that generates the above cash flows. If the periods are of 3-month intervals, which of the following best describes that bond? 0..1(has not 57.5)...2(57.5)...3(57.5)...59(57.5).....60(5057.5) A.) a 15-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly B.)a 15-year bond with a notional value of $5000 and a coupon reate of 1.2% paid annually C.)a 30-year bond with a notional value of $5000 and a coupon rate of 3.5% paid semiannually D.) a 60-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly

A.) 60 x (1/4)=15

A risk-free, zero-coupon bond with a face value of $10,000 has 15 years to maturity. If the YTM is 6.1%, which of the following would be closest to the price this bond will trade at? A) $4937 B) $5760 C) $6582 D) $4114

D) 4114

A university issues a bond with a face value of $5000 and a coupon rate of 4.41% that matures on July 15, 2018. The holder of such a bond receives coupon payments of $110.25 . How frequently are coupon payments made in this case? A) monthly B) quarterly C) semiannually D) annually

C) semiannually (5000x4.41%)/110.25=2

how to estimate the cost of common stock?

CAPM model and dividend pricing model

Assume the equity beta for Johnson & Johnson is 0.55. The yield on 10-year treasuries is 3% and you estimate the market risk premium to be 6%. Furthermore J & J issues dividends at an annual rate of $2.81. Its current stock price is $92 and you expect dividends to increase at a constant rate of 4% per year. Estimate J&J cost of equity in two ways.Re=Rf+B(Rm-Rf) Re=[Do(1+g)]/P

CAPM: Re=Rf+B(Rm-Rf)=6.30% =3+0.55(6)=6.30% Dividend pricing model:Re=[Do(1+g)]/P =[2.81(1+0.04)]/92=7.18%

You purchased a bond for $875 it has a face value of $1000, it pays $80 a year, and it matures after ten years. What is the current yield? What is the yield to maturity?

CY=annual interest payment/current price of bond YTM(I): pv=-875 fv=1000 PMT=80 N=10 YTM= 10.04% CY=80/875=9.14%

3 components of cost of capital?

Cost of debt, preferred stock, and common stock

What is the difference between current yield and yield to maturity?

Current yield measures returns at any given moment. (moment of sale, realized). The YTM measures returns over the life of the bond.

A $1000 bond with a coupon rate of 6.2% paid semiannually has eight years to maturity and a yield to maturity of 8.3%. If interests rates rise and the yield to maturity increases to 8.6%, what will happen to the price of the bond? A.) the price fo the bond will fall by 18.93 B.) the price of the bond will fall by 15.78 C.) The price of the bond will rise by 15.78 D.) the price of the bond will not change.

FV=1000 PMT= 6.2%x1000/2=31 N=8x2=16 I/YR=8.3/2=4.15, PV is 879 I/YR=8.6/2=4.3, PV is 863 B.) the price of the bond will fall by 15.78

In Q3 suppose that the cost of capital for this company is 10%. Calculating IRR, do you accept or reject the project?

For IRR look at cost of capital

why can't a firm's manager infinitely use debt financing?

Infinitely use debt financing the cost of capital would keep increasing. should be a balance between equity and debt to mininumize the cost.

you are considering buying a 10 year $1000 bond with a coupon rate of 6% paid annually. If the discount rate is 6%, what is the maximum that you are willing to pay for this bond? How about with discount rate at 12%? and at 3% When is the bond selling at par? And when it is selling at a premium?

N=10, FV=1000, PMT=60. I=6: pv = 1000 (at par) I=12: pv=660.99 (discount) I=3: pv= 1255.91 (premium)

An investor buys a $1000 20 year with 7% coupon, bond at par. After five years have passed, interest rates are %10 what would be the new price of this bond?

N=20-5=15 FV=1000 I=10 PMT=70 PV=771.82

What is the price of a zero coupon bond that matures after six years if the bond is priced to yield 7 percent?

N=6 PMT=0 I=7 PV=666.34

what is the equation of NPV?

NPV = PV (Benefits) - PV (Costs). NPV > 0 ： accept the project NPV < 0 ： reject the project

What is the coupon rate of an eight-year, $10000 bond with semiannual coupons and a current price of $9006.6568, if it has a yield to maturity of 6.5%?

PV=-9006.6568 N=8x2=16 FV=10000 YTM(I): 6.5/2=3.25 PMT=?=244.40x2=488.8=4.89%

The expected return on Target's equity is 11.5% and the firm has a yield to maturity on its debt of 6%. Debt accounts for 18% and equity for 82% of Target's total market value. If its tax rate is 35% what is this firms WACC?

Rwac=WdRd+WeRe=Wdi(1-Tc)+WeRe=(0.18)(0.06)(1-0.35)+(0.82)(0.115)=10.1%

what is the differences between NPV and IRR?

The NPV method results in a dollar value that a project will produce, while IRR generates the percentage return that the project is expected to create. Purpose. The NPV method focuses on project surpluses, while IRR is focused on the breakeven cash flow level of a project.

What is default?

The failure of a firm to meet its terms of indenture.

What is indenture of bond?

The legal document specifying the term's of debt.

The expected return on target's equity is 11.5% and the firm has a yield to maturity on its debt is 6%. Debt accounts for 18% and equity for 82% of targets total market value. if its tax rate is 35% what is the firm's WAAC?

WACC= YTM (1-tax rate) x debt weight + return on equity x weight of equity 0.06 (1-0.35) x 0.18 +0.115 x 0.82 10.3%

Difference between Treasury bills, notes, bonds, strips?

duration

What is the relationship between bond prices and interest rates?

inverse

What types of cash flows does a bond buyer receive?

coupons and face value.

What is the difference between an investment grade bond and a high yield bond (junk bond)?

investment grade bond is BBB or better and high yield (junk) bonds are below BBB.

why is it important for firms to know the cost of capital?

minimize the cost of capital and maximazie firm value

What is Yankee bond? What is Eurobond?

not on test

In mid-2017, the market values of DuPont's common stock, preferred stock, and debt were $53,240 million, $221 million, and $14,080 million, respectively. The company has a beta of 1.09 and the market risk premium is 5.6%. the risk free rate is 4%. The yield to maturity of the company's bond is 6.25% and the tax rate is 35% the company's preferred stock was priced at $46 and dividend paid on the preferred stock is $2.8/share. what is the DuPoint's WACC

on slides

WACC formula on test.

r = W1Rd + W2Rp + W3Re

CBA has bonds issued with 15 years to maturity, 8% coupon paid annually and priced at 102.5% to face value. If the tax rate is 35% what is the effective cost of debt?

rd=i(1-t) YTM(I)=?=0.0771 rd=0.050115=5.01

The after-tax cost of equity is _______ the pretax cost of equity

the same as

why care about capital structure?

to minimize cost of capital

The __________ of a firm's debt can be used as the firm's current cost of debt.

yield to maturity

what is the effective cost of debt?

𝑟𝑑 = 𝑖(1 − 𝑡) •