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1. Suppose you bought a 16 percent coupon bond one year ago for $1,130.

•The bond sells for $1,190 today.

•What is your realized percentage return if you sell the bond today?

2. Suppose a stock had an initial price of $77 per share, paid a dividend of $1.05 per share during the year, and had an ending share price of $83.

–What is the dividend yield?

–What is the capital gains yield?

3. Average annual return is a good measure of expected return when?

A.Returns are volatile over time

B.The distribution of possible returns does not change over time

C.Negative estimation errors cancel out positive estimation errors

D.Never - this is not a good measure of expected return

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Keith Leannon
Keith LeannonLv2
28 Sep 2019

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1. You intend to buy a bond issued by ABC Inc. The bond has 15 years remaining to maturity, $1,000 par value and is paying 8% annual coupon.

(a) How much will you pay for the bond if its YTM is currently 7%?

(b) One year later, the bond’s YTM has risen to 10%. What are the current yield, capital gains yield and total yield of your bond investment?

2. Which of the following statements is true or false? Briefly explain your answer.

(a) “Accept the project when its IRR is greater than zero because it is creating value”

(b) “NPV of the project being negative implies that the project is loss-making.”

3. (a) Stock A just paid a dividend of $2 and its management has also announced that it will pay a dividend of $2.12 in the coming year. If you expect the dividend growth of Stock A will remain in the current level forever, how much should Stock A worth today if the required rate of return is 10%?

(b) Alice has just paid a dividend of $30 per share and the management has indicated that it will increase the dividend payments by 20%, 18% and 15% in each of the coming three years, and 10% per year thereafter. Alice’s cost of equity is 17.5%. Estimate the intrinsic value of Alice share.

Part II. (40 points; 2 points each) Make sure you write BOTH the formulas/calculator function keys AND answer for each question. Formulas/function keys are worth 1 point, and answers are worth 1 point each.

21) October Enterprise has a 13-year bond issue outstanding that pays a 9.5% coupon. The bond is currently quoted at 93.8 and has a par value of $1,000. Interest is paid semiannually. What is the yield to maturity?

22) Genesis, Inc. has $1,000 face value bonds outstanding with a market price of $1001. The bonds pay interest semiannually, mature in 15 years, and have a yield to maturity of 5.87 percent. What is the current yield?

23) A 8-year, semiannual coupon bond is priced at $927. The bond has a $1,000 face value and a yield to maturity of 4.6 percent. What is the coupon rate?

24) Oceanview, Inc. bonds have a face value of $1,000. The bonds carry a 9 percent coupon, pay interest semiannually, and mature in 15 years. What is the current price of these bonds if the yield to maturity is 7.7 percent?

25) The nominal rate of return on the bonds of Springs Co. is 7.82%. The real rate of return is 2.94%. What is the rate of inflation?

26) Ginger Foods just paid its annual dividend of $2.4 a share. The firm recently announced that all future dividends will be increased by 3 percent annually. What is one share of this stock worth to you if you require a 10 percent rate of return?

27) Stock A just paid a $3.8 a year dividend which is expected to increase by 4.5% per year. If you are planning on buying this stock three years from today, how much should you expect to pay per share if the market rate of return for this type of security is 7.7% at the time of your purchase?

28) Salad Bowl, Inc. recently paid a $6.6 annual dividend on its common stock. This dividend increases at an average rate of 3% per year. The stock is currently selling for $80 a share. What is the market rate of return?

19. Which of the following best defines the term “dividend record date”?

A. The date that the dividend is paid to the shareholders.

B. The date that shareholders listed on the corporate books will receive the dividend.

C. The date that the stock trades without the dividend.

D. The date that the highest dividend in the company history has been announced.

20. Which of the following best describes the risk measure known as beta?

A.

A measure of efficient frontier.
B.

A measure of state dependent returns.
C.

A measure of risk that cannot be diversified away by conforming portfolios.
D.

A measure of the expected return of the market.

21. Western Electric has 23,000 shares of common stock outstanding at a price per share of $57 and a rate of return of 14.2 percent. The firm has 6,000 shares of 7 percent preferred stock outstanding at a price of $48 a share. The preferred stock has a par value of $100. The company also has 350 corporate bonds, each with $1000 par value, and the bond currently sells for 102 percent of face. The yield-to-maturity on the debt is 8.49 percent.

What is the firm's weighted average cost of capital if the tax rate is 34 percent?

A.

14.19%
B.

13.44%
C.

12.69%
D.

14.47%

PLEASE ANSWER ALL QUESTIONS

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