FIN3403 Final Exam Study

The common stock of Ruby Janes pays a constant annual dividend. Thus, the market price of Ruby Janes stock will:

*** Decrease when the market rate of return increases.

The Music Hut just paid an annual dividend of $1.05 a share. The projected dividends for the next five years are $1.07, $1.10, $1.15, $1.20, and $1.25, respectively. After that time, the dividends will be held constant at $1.40 per share. What is this stock worth today at a 12.5 percent discount rate? ( ) $9.59 ( ) $10.29 ( ) $11.34 ( ) $12.67 ( ) $13.19

*** Music Hut: This is done similarly to those done in the notes, but it combines both the dividends actually paid and the no growth in dividends model or the perpetuity model. So you enter 0 as the zero cash flow, then each dividend for the next 4 cash flows, and finally the 5th cash flow is the PV of the perpetuity of the 1.4 paid forever or P=1.4/.125=11.2, PLUS THE 1.25 fifth DIVIDEND for a total of 12.45 for the 5th cash flow. When I do this putting in 12.5 as interest, I get 10.285 or 10.29. So: Press 0, SHIFT, STO, CFj $0 Press 1.07, SHIFT, STO, CFj $1.07 Press 1, Nj 1 Press 1.1, SHIFT, STO, CFj $1.1 Press 1, Nj 1 Press 1.15, SHIFT, STO, CFj $1.15 Press 1, Nj 1 Press 1.2, SHIFT, STO, CFj $1.2 Press 1, Nj 1 P=1.4/.125=11.2 1.25+11.2=12.45 Press 12.45, SHIFT, STO, CFj $12.45 Press 1, Nj 1 i=12.5% Press 12.5, I/YR, SHIFT, then NPV. NPV=10.285. Round it and you get $10.29

Cellular Talk is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 25 percent a year for the next three years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount of $0.80 per share. What is the current value of one share of this stock if the required rate of return is 17 percent?

*** This is supernormal or differing rates of growth model, so you increase the 80 cent dividend for three years then use the constant growth model when it changes: d1=.80(1.25)=1, d2=d1(1.25)=1(1.25)=1.25, d3=d2(1.25)=1.56, then use constant growth with this dividend to get P3=1.56(1.06)/[.17-.06]=15.03. Now enter these into the uneven CF keys making sure you add the third dividend and P3 together as the third CF: Press 0, SHIFT, STO, CFj 0 Press 1, SHIFT, STO, CFj 1 Press 1, Nj 1 Press 1.25, SHIFT, STO, CFj 1.25 Press 1, Nj 1 1.56+15.03=16.59 Press 16.59, SHIFT, STO, CFj 16.59 Press 1, Nj 1 I=17 Press 17, I/YR, SHIFT, then NPV. NPV=12.126. I round it and I get $12.13 ***

Q: A 7 percent preferred stock pays a total of _____ a year in dividends per share. Assume dividends are paid quarterly. Answer choices: ( ) $3.50 ( ) $7.00 ( ) $14.00 ( ) $21.00 ( ) $28.00

****a 7% preferred is 7% of $100. So $7 a year.

How much are you willing to pay for one share of Delphia stock if the company just paid a $1.34 annual dividend, the dividends increase by 2.8 percent annually, and you require a 14 percent rate of return?

Answer: $12.30 This is a very simple application of the constant growth model: P=d(1+g)/(r-g)=1.34(1.028)/(.14-.028)=$12.30.

Gerold's Travel Service just paid $1.79 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 3.2 percent. If you require a 10.5 percent rate of return, how much are you willing to pay to purchase one share of this stock?

Answer: $25.31 P=1.79(1.032)/(.105-.032)=$25.31

Shares of common stock of the Windy Farms offer an expected total return of 13.8 percent. The dividend is increasing at a constant 4.2 percent per year. What is the dividend yield?

Answer: 9.60% Here it says that dividend is increasing at 4.2%, so g=4.2% and r=13.8%, then using the constant growth model and solving for r (as done in the notes) r=d1/p + g, then 13.8=d1/p + 4.2 and solving for d1/p=13.8-4.2-=9.6%

McConnell Corporation has bonds on the market with 14.5 years to maturity, a YTM of 5.3 percent, a par value of $1,000, and a current price of $1,045. The bonds make semiannual payments. What must the coupon rate be on these bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Coupon rate: 5.75% Enter N = 29 I/Y = 5.3%/2 PV = ±$1,045 FV = $1,000 Solve for PMT PMT= $28.74 $28.74(2)/$1,000 = .0575, or 5.75%

Weismann Co. issued 15-year bonds a year ago at a coupon rate of 4.9 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 4.5 percent, what is the current bond price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Enter N = 28 I/YR = 4.5/2 PMT = ±$49/2 FV = ±$1,000 Solve for PV $1,041.22

Excey Corp. has 8 percent coupon bonds making annual payments with a YTM of 7.2 percent. The current yield on these bonds is 7.55 percent. How many years do these bonds have left until they mature? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Maturity of bond: 11.06 years Calculator Solution: Current yield = .0755 = $80/P0 P0 = $80/.0755 = $1,059.60 Enter I/YR = 7.2 PV = ±$1,059.60 PMT = $80 FV = $1,000 Solve for N N= 11.06

A Japanese company has a bond outstanding that sells for 87 percent of its ¥100,000 par value. The bond has a coupon rate of 4.3% paid annually and matures in 18 years. What is its YTM of this bond?***So the bond has a price of 87,000Yen, then we have the following:

N=18 Pmt=4,300 FV=100,000 PV=-87,000 i=??=5.45%

Annuity car problem You want to buy a new sports coupe for $50,000, and the finance office at the dealership has quoted you a 9.2 percent APR loan for 48 months to buy the car. Your monthly payment will be $ and the effective annual rate on this loan is ?? percent?

Ok so this is a monthly annuity, so in the Fin Calc: N=48, i=9.2/12=.766666, PV=50000, PMT=??-1249. FV=0 Next the want the EAR, so the EAR=[(1+apr/m)^m - 1], so EAR=[(1+.092/12)^12 - 1]=.09598.

You want to buy a new sports coupe for $84,500, and the finance office at the dealership has quoted you an APR of 5.2 percent for a 60-month loan to buy the car. a. What will your monthly payments be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the effective annual rate on this loan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

a. Monthly payment $1,602.37 b. Effective annual rate 5.33 % Explanation Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. We first need to find the annuity payment. We have the PVA, the length of the annuity, and the interest rate. Using the PVA equation: PVA = C({1 − [1/(1 + r)t]}/r) $84,500 = $C[1 − {1/[1 + (.052/12)]60}/(.052/12)] Solving for the payment, we get: C = $84,500/52.7343 C = $1,602.37 To find the EAR, we use the EAR equation: EAR = [1 + (APR/m)]m − 1 EAR = [1 + (.052/12)]12 − 1 EAR = .0533, or 5.33% Calculator Solution: Note: when using finance calc. don't press the % when inputing the number for I/YR Enter N 60 I/YR 5.2%/12 PV ±$84,500 FV $0 Solve for PMT $1,602.37 Enter NOM 5.2% P/YR 12 Solve for EFF 5.33%