FIN 3320- MODULE 3
D1=Po(rs-g) =57.50(10.25-6.00) =2.44
Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D 1?
Stock X= 35000/10000(1.50)=0.53 Stock Y = 65000/100000(0.70)= 0.46 Stock X+ Stock Y= Portfolio Beta 0.53+0.46= 0.99
ill Dukes has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?
If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.
A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?
D1=0.75 rs=10.5 g=6.4 current stock price Po=D1/rs-g =0.75/10.5-6.4 =18.29
A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is r s = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?
2 Year dividend growth rate = 1.5% Dividend growth rate after 2 yrs = 8% rs = 12% Past dividend D0 = $1.55 Year 1 dividend = D0 (1+g) = 1.55 x (1+0.015) = 1.57325 Year 2 dividend = D1 (1+g) = 1.57325 x (1+0.015) = 1.5968 Stock price after year 2 = [D2 (1+g)] / [rs-g] = [1.5968x1.08]/[0.12-0.08] = 43.11 Discount current amount at 12% rate for persent value: 1.57325/0.12 + 1.5968/0.12^2 + 43.11/1.12^2 = $37.05
Ackert Company's last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (r s) is 12.0%. What is the best estimate of the current stock price?
Default and liquidity risk differences.
Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72%A = 9.64%AAA = 8.72%BBB = 10.18% The differences in rates among these issues were most probably caused primarily by:
r A = 7.00 + 1.5 * (13.25 - 7.00) r A = 16.375% r B =7.00 + (13.25 - 7.00) * -0.5 r B = 3.875% r C = 7.00 + 1.25 * (13.25 - 7.00) r C = 14.8125% r D = 7.00 + 1.75 * (13.25- 7.00) r D = 17.9375% Total investment in GIF = 200,000 + 300,000 + 500,000 + 1,000,000 Total investment in GIF =2,000,000 required rate of return of Global Investment Fund (GIF) is, r Portfolio =16.375%* 200000/2000000 + 3.875 * 300000/2000000 +14.8125 * 500000/2000000 + 17.9375 * 1000000/2000000 r Portfolio = 14.89%
Consider the following information and then calculate the required rate of return for the Global Investment Fund, which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows: Stock A B C D Investment $200,000 $300,000 $500,000 1,000,000 Beta 1.50 -0.50 1.25 0.75
FV= -1000 N= 10 yrs PMT (annual coupon)= 5.5/100x1000= -55 i/y=7 PV=? 894.65
D. J. Masson Inc. recently issued noncallable bonds that mature in 10 years. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?
n=15 pv=-1165 pmt=95 fv=1000 cpt i/y= 7.62
Ezzell Enterprises' noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?
Current Yield = Annual Interest / Price = 85/1,150=0.07x100=7.39
Garvin Enterprises' bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?
rs= D1/Po+g rs= 1.25/44 +0.055 =0.083409 =8.34
If D 1 = $1.25, g (which is constant) = 5.5%, and P 0 = $44, what is the stock's expected total return for the coming year?
We first have to calculate the present value of the bonds: FV=-1000 N= 10x2=20 i/y= 12/2=6 PMT=0.04x1000/2= -20 CPT Pv= 541.20 Now we calculate how many bonds were issued =Long-term debt (bonds, at par)$10,000,000/1000 =10,000 current market value of the firm's debt=present value of the bonds times the total number of bonds outstanding=541.20 x10,000=5412031.51
In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par)$10,000,000 Preferred stock2,000,000 Common stock ($10 par)10,000,000 Retained earnings 4,000,000 Total debt and equity$26,000,000 The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?
CV= Stand deviation/rate of return = 10%/15% =0.67
Levine Inc. is considering an investment that has an expected return of 15% and a standard deviation of 10%. What is the investment's coefficient of variation?
Beta= 1.30 Mrket rate= 13% Risk free rate = 6.5% Required return= Risk free rate +beta(market rate-risk free rate) = 6.5+1.30(13%-6.5) =6.5+8.45 =14.95%
Linke Motors has a beta of 1.30, the T-bill rate is 6.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%. Based on CAPM, what is the firm's required return?
50/100(25)=12.50 30/100(10)=3.00 20/100(-28)=-5.60 =9.90
Maxwell Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm's expected rate of return?
n=10x2=20 i/y=4.75/2=2.38 pmt= 0.0625/2 x 1000=31.25 fv=-1000 cpt pv= 1118.31 correct
Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond's price?
Year 0 1 2 3 Growthrates: 30.0% 10.0% 5.0% Dividend: 1.32 1.716 1.888 1.982 Horizon value = D3/(rs-g3) =49.550 Total CFs 1.716 51.437 PV of CFs 1.574 43.294 Stock price = $44.87
Nachman Industries just paid a dividend of D 0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?
FV(Bond's par value) = $1,000 N= 25 × 2 = 50 periods (since it's semi-annual) i/y=9.25/2=4.63 PV= - 850 PMT=? PMT=38.55 Annual coupon Payement =38.55x2= 77.10 Nominal coupon rate= Annual coupon payment/par value=77.10/1000 =0.08 0r7.71%
O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate?
25/100(30)=7.50 50/100(12)=6.00 25/100(-18)=-4,50 =9.00
Preston Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return?
N= 5 pv= -1280 pmt= 135 fv= 1050 CPT I/y=7.45
Sadik Inc.'s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. The yield to call (YTC) for the bonds is closest to:
We have given dividend paid D0=0.75/share Growth rate (g) = 6.5 % Required return on market = 10.50 % Risk free return = 4.50 % beta= 1.25 So next dividend D1= D0(1+g) = 0.75(1+0.065) = 0.79875 We have to find the company current stock price The required rate of return is given by: Required rate of return = Risk Free Return + beta(market return-risk free return = 4.5+ 1.25(10.5-4.5) = 12 % Now current stock price Po=D1/rs-g =0.79875/12-6.5 =0.14522 =14.52
Schnusenberg Corporation just paid a dividend of D 0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?
Stock A= 37500/100000(0.75) =0.28 Stock B= 62500/100000(1.42) =0.89 Stock A+ Stock B = Portfolio Beta 0.28+ 0.89= 1.17
Tom O'Brien has a 2-stock portfolio with a total value of $100,000. $37,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is his portfolio's beta?
The stock's expected dividend yield and growth rate are equal.
Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT? =Expected dividend, D1$3.00 Current Price, P0$50 Expected constant growth rate6.0%
These two stocks must have the same dividend yield
Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A B Required return 10% 12% Market price $25 $40 Expected growth 7% 9%
If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.
The required returns of Stocks X and Y are r X = 10% and r Y = 12%. Which of the following statements is CORRECT?
CV= Standard Deviation/ expected return = 30%/25% = 1.20
Wei Inc. is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%. What is the project's coefficient of variation?
when the interests in the market decline sharply.
Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.
Which of the following statements is CORRECT, assuming stocks are in equilibrium?
An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well diversified portfolio of stocks.
Which of the following statements is CORRECT?
B;A
You have the following data on three stocks: Stock A B C Standard Deviation 20% 10% 12% Beta 0.59 0.61 1.29 If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.
