Finance HW 2

A bond has a face value of $1,000, an 8.5 percent, semi-annual coupon, and a market price of $1,065.53. How many years will it be until this bond matures if the yield-to-maturity is 7.4 percent?

$1,065.53=.085×$1,0002×{1−[1/(1+.0742)t×2].0742}+$1,000(1+.0742)t×2$1,065.53=.085×$1,0002×{1−[1/(1+.0742)t×2].0742}+$1,000(1+.0742)t×2t = 16 semi-annual periods = 8 years 8 years

The 5 percent, semi-annual bonds issued by Black Water Mills mature in 9 years and have a face value of $1,600. What is the current value of one of these bonds if the market rate of return is 10.5 percent?

$1,095.56

A stock is selling for $13.10 a share given a market return of 20 percent and a capital gains yield of 7.4 percent. What was the amount of the last annual dividend that was paid?

$13.10= (D0 ×1.074) / (0.200 - .074); D0 = $1.54

Angelo Importers has not paid the last two quarterly preferred dividends of $1.50 per share. How much must the firm pay per share of preferred stock this quarter if the firm also wants to pay a common stock dividend? Assume the preferred stock is cumulative preferred.

$4.50

An investment offers a total return of 14 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 10 percent. What does Janice believe the inflation rate will be over the next year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

(1 + R) = (1 + r)(1 + h) h = (1 + .14)/(1 + .10) - 1 h = .0364, or 3.64%

What was the closing price for this stock that appeared in yesterday's paper?

.020 = $2.80 / P0 P0 = $2.80 / .020P0 = $140.00 Yesterday's closing price = $140.00 + .79Yesterday's closing price = $140.79 PE = Stock price / EPS15 = $140.00 / EPSEPS = $140.00 / 15 EPS = $9.33 EPS = Net income / Shares$9.33 = Net income / 31,000,000Net income = $9.33(31,000,000) Net income = $289,333,333.30

Treasury bills are currently paying 7 percent and the inflation rate is 2.7 percent. a. What is the approximate real rate of interest? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b.What is the exact real rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Approximate r = .07 - .027 Approximate r = .043, or 4.30% (1 + R) = (1 + r)(1 + h) (1 + .07) = (1 + r)(1 + .027) r = (1 + .07)/(1 + .027) - 1 r = .0419, or 4.19%

The 10-year bonds issued by McMillan & Co. pay interest semi-annually on January 1 and July 1. Today is August 1 and no interest has been paid on these bonds during this calendar year. What bond rating should be applied to these bonds?

D

An 8.20 percent, semi-annual coupon bond has a face value of $1,200 and a current market value of $1,430. What is the current yield?

Current yield = (0.082 × $1,200) / $1,430 = 6.88 percent

Which one of the following statements related to preferred stock is correct?

From a legal point of view, preferred stock is classified as corporate equity.

West Corp. issued 10-year bonds two years ago at a coupon rate of 8.4 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

N= 8*2 I= PV=1050 PMT=84/2 FV=1000

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 10 years to maturity, and a coupon rate of 6.4 percent paid annually. If the yield to maturity is 7.5 percent, what is the current price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

N=10 I=7.5 PV= PMT=64 FV=1,000 924.50

Gabriele Enterprises has bonds on the market making annual payments, with ten years to maturity, a par value of $1,000, and selling for $980. At this price, the bonds yield 7.5 percent. What must the coupon rate be on the bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

N=10 I=7.5 PV=980 PMT= FV=1,000 72.09/1,000 7.21

A Japanese company has a bond outstanding that sells for 88 percent of its ¥100,000 par value. The bond has a coupon rate of 5.5 percent paid annually and matures in 17 years. What is the yield to maturity of this bond (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

N=17 I= PV=88,000 PMT=5,500 FV=100,000

Wesimann Co. issued 14-year bonds a year ago at a coupon rate of 8.6 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 6.9 percent, what is the current bond price?

N=26 I=6.9/2 PV= PMT=86/2 FV=1,000 1,144.38

You find a zero coupon bond with a par value of $10,000 and 26 years to maturity. The yield to maturity on this bond is 4.8 percent. Assume semiannual compounding periods. What is the price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

N=26 × 2 I/Y=4.8%/2 PV PMT FV=±$10,000 PV= 2,913.41

A proposed project has an initial cost of $75,500 and is expected to produce cash inflows of $26,200, $48,100, and $40,000 over the next 3 years, respectively. What is the net present value of this project at a discount rate of 14.6 percent?

NPV = -$75,500 + ($26,200 / 1.146) + ($48,100 / 1.146^2) + ($40,000 / 1.146^3) = $10,563.99

Which one of the following statements related to net present value is correct?

Net present value is, generally speaking, the best means of analyzing a project.

A stock is selling for $38 a share. There are 155,000 shares outstanding and the net income of the firm is $447,000. What is the P/E ratio?

P/E = $38/ ($447,000 / 155,000) = 13.18

The James Clothing Co. pays a constant annual dividend of $4.00 per share. What is one share of this stock worth to you today if you require a 27 percent rate of return?

P0 = $4.00 / 0.27 = $14.81

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.55 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year indefinitely. Investors require a return of 14 percent on the company's stock.

P0 = D0(1 + g) / (R − g) P0 = $1.55(1.06) / (.14 − .06) P0 = $20.54 P3 = D3(1 + g) / (R − g) = D0(1 + g)4 / (R − g) P3 = $1.55(1.06)4 / (.14 − .06) P3 = $24.46 P7 = D7(1 + g) / (R − g) = D0(1 + g)8 / (R − g) P7 = $1.55(1.06)8 / (.14 − .06) P7 = $30.88

Caan Corporation will pay a $2.50 per share dividend next year. The company pledges to increase its dividend by 3 percent per year indefinitely. If you require a return of 10 percent on your investment, how much will you pay for the company's stock today?

P0 = D1 / (R − g) P0 = $2.50 / (.10 − .03) P0 = $35.71

LB Moore has 30,000 shares of common stock outstanding. The firm just paid an annual dividend of $1.70 per share on this stock. The market rate of return is 14.50 percent. What will one share of this stock be worth one year from now if the dividends grow by 4.00 percent annually?

P1 = ($1.70 × 1.040^2) / (0.145 - 0.040) = $17.51

A project has an initial cost of $15,000 and cash inflows of $3,400, $4,200, $7,600, and $3,650 over the next 4 years, respectively. What is the payback period?

Payback period = 2 + [($15,000 - 3,400 - 4,200) / $7,600 ] = 2.97 years

Which one of the following statements related to the internal rate of return is correct?

Projects with unconventional cash flows may have multiple internal rates of return.

Kate wants to earn a 5.00 percent real rate of return. To do this, what nominal rate must she earn if the inflation rate is 4.10 percent?

R = (1.050 × 1.041) - 1 = 9.31 percent

The next dividend payment by Halestorm, Inc., will be $2.12 per share. The dividends are anticipated to maintain a growth rate of 8 percent forever. If the stock currently sells for $43 per share, what is the required return?

R = (D1 / P0) + g R = ($2.12 / $43) + .08 R = .1293, or 12.93% Capital gains yield = 7%

Moraine, Inc., has an issue of preferred stock outstanding that pays a $4.15 dividend every year in perpetuity. If this issue currently sells for $95 per share, what is the required return?

R= D / P0 R = $4.15 / $95 R = .0437, or 4.37%

A 9 percent preferred stock sells for $54.50 a share. What is the rate of return?

Rate of return = (0.09 × $100) / $54.50 = 16.51 percent

A municipal bond yields 5.3 percent. What is the taxable-equivalent yield for an individual who has a 38 percent marginal tax rate?

Taxable equivalent yield = 0.053 / (1 - 0.38) = 8.55 percent

Locate the Treasury issue in Figure 7.4 maturing in May 2037. Assume a par value of $10,000. a.What is its coupon rate? b.What is its bid price in dollars? c.What was the previous day's asked price in dollars?

The coupon rate, located in the second column of the quote, is 5.000 percent. The bid price is: Bid price = 135.9531 = 135.9531% Bid price = (135.9531/100)($10,000)Bid price = $13,595.31 The previous day's asked price is found by: Previous day's asked price = Today's asked price - Change Previous day's asked price = 136.0156 - .7656 Previous day's asked price = 135.2500 The previous day's price in dollars was: Previous day's dollar price = 135.2500 = 135.2500% Previous day's dollar price = (135.2500/100)($10,000) Previous day's dollar price = $13,525.00

You are comparing two mutually exclusive projects. Both projects have an initial cost of $49,000 . Project A has cash inflows of $30,000 , $27,000 , and $24,000 over the next 3 years, respectively. Project B has cash inflows of $19,000 , $24,600 and $45,000 over the next 3 years. What is the crossover rate for Projects A and B?

Time period of cash flow= A-B Using a financial calculator: Your cash flows would be the difference found from above. IRR = 27.69 percent

Locate the Treasury bond in Figure 7.4 maturing in February 2040. Assume a $10,000 par value. a.Is this a premium or a discount bond? b.What is its current yield? c.What is its yield to maturity? d.What is the bid-ask spread in dollars?

The current yield is based on the asked price, so the current yield is: Current yield = Annual coupon payment/Price Current yield = $462.50/$12,978.13 Current yield = .0356, or 3.56% The YTM is located under the "Asked Yield" column, so the YTM is 2.855 percent. The bid-ask spread is the difference between the bid price and the ask price, so: Bid-ask spread = 129.7813 - 129.7188Bid-ask spread = .0625 In dollars, the bid-ask spread is: Bid-ask spread = (.0625/100)($10,000)Bid-ask spread = $6.25

Whichever project you choose, if any, you require a 15 percent return on your investment. What is the discounted payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

The discounted payback for each project is: A:$37,000 / 1.15 + $57,000 / 1.152 + $57,000 / 1.153 = $112,752.53 $432,000 / 1.154 = $246,997.40 Discounted payback = 3 + ($358,000 - 112,752.53) / $246,997.40 = 3.99 years B:$23,200 / 1.15 + $21,200 / 1.152 = $36,204.16 $18,700 / 1.153 = $12,295.55 Discounted payback = 2 + ($46,000 - 36,204.16) / $12,295.55 = 2.80 years

Which one of the following statements must be true concerning a project if the project's profitability index is 1.05?

The net present value must be positive.

A project has an internal rate of return of 10.6 percent. Which one of the following statements must be true based on this information?

The present value of the cash inflows must equal the initial cost of the project at a discount rate of 10.6 percent.

Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true?

The stock has a negative capital gains yield.

Alberto Trucking is expected to pay an annual dividend of $2.50 per share next year. The stock is currently selling for $33.50 a share. What is the expected total return on this stock if that return is equally divided between a dividend yield and a capital gains yield?

Total return = 2 × (2.50 / 33.50) = 14.93 percent

The Fishing Pier has 7.60 percent, semi-annual bonds outstanding that mature in 12 years. The bonds have a face value of $1,000 and a market value of $1,147. What is the yield to maturity?

Use calc and solve for Interest Solve for 5.88

A project has an initial cost of $54,700 and is expected to produce cash inflows of $19,300, $27,400, and $44,700 over the next 3 years, respectively. What is the project's internal rate of return?

Using a financial calculator: IRR = 26.24 percent

Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $1.70 next year. The growth rate in dividends for all three companies is 7 percent. The required return for each company's stock is 9.30 percent, 11.30 percent, and 14.70 percent, respectively.

We can use the constant dividend growth model, which is: Pt = Dt × (1 + g) / (R - g) So the price of each company's stock today is: Red stock price = $1.70 / (.093 - .07) = $73.91 Yellow stock price = $1.70 / (.113 - .07) = $39.53 Blue stock price = $1.70 / (.147 - .07) = $22.08

An investor who wishes to buy a bond will do so at which one of the following prices if the bond's coupon rate is 6 percent and its yield-to-maturity is 6.4 percent?

asked price

An agent who arranges a transaction between a buyer and a seller of equity securities is called a:

broker

Which one of following is the rate at which a stock's price is expected to appreciate?

capital gains yield

The person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):

commission broker

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?

common

An unsecured bond that will mature in 13 years is called a:

debnature

A 5-year, 8 percent, annual, coupon bond is currently selling at par. What will happen to the bond's price if the market rate of return increases to 9 percent?

decrease

Which one of the following is computed by dividing next year's annual dividend by the current stock price?

dividend yield

What are the distributions to shareholders by a corporation called?

dividends

An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal account is called a:

floor trader.

Which one of the following represents the capital gains yield as used in the dividend growth model?

g

Which of the following methods of project analysis are most commonly used by CFO's?

internal rate of return and net present value

The discounted payback period for a project will be _______ the payback period for the project given a positive, non-zero discount rate.

longer than

An indenture agreement includes all of the following EXCEPT:

market rate of return.

The payback method of project analysis:

may ignore some project cash flows.

A project has an initial cash outflow of $1,090 and cash inflows of $310 per year for 4 years. What is the discounted payback period at a discount rate of 9.0 percent?

never

The net present value rule states that you should accept a project if its' net present value:

positive

Which one of the following authorizes another individual to vote on your behalf at a shareholders meeting?

proxy

Sue purchased a bond one year ago. Today, she sold the bond and realized a 12.2 percent rate of return on her investment. What was her real rate of return if the inflation rate was 7.3 percent for this past year?

r = (1.122/ 1.073) - 1 = 4.57 percent

A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a:

specialist

Joe is stationed at a post on the floor of the NYSE and functions as a market maker for ABC stock only. Joe is which one of the following?

specialist

The profit a dealer makes from buying and selling a security is called the:

spread.

Which one of the following factors is considered by the discounted payback method of analysis but not by the payback method?

time value of money

Nelson's Industrial Supply is considering a project that has projected cash inflows of $7,200 a year for 4 years. The initial cost of the project is $21,000 and the required return is 11.25 percent. Should this project be accepted based on the profitability index criterion? Why or why not?

yes; because the PI is 1.06