Week 3 - Assignment - Financial management PDF

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Corporate Finance - Assignment for week 3...

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1. What is the price of a 15-year, zero coupon bond paying $1,000 at maturity, assuming semiannual compounding, if the YTM is: a. 6 percent? b. 8 percent? c. 10 percent? Price = Bond/ (1 + YTM/2) ^2*years For 6% Price = $1000/ (1 + 0.06/2) ^30 Price when YTM is 6% = $411.99 For 8% Price = $1000/ (1 + 0.08/2) ^30 Price when YTM is 8% = $308.32 For 10% Price = $1000/ (1 + 0.10/2) ^30 Price when YTM is 10% = $231.38 2. 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, 15 years to maturity, and a coupon rate of 4.5 percent paid annually. If the yield to maturity is 3.9 percent, what is the current price of the bond? Coupon rate = 4.5% Years (NPER) = 15 Face value = 1000 Monthly payment = face value * coupon rate = 1000 * 0.045 = 45 Yield or rate = 3.9% Current price is same as present value. (Used excel spreadsheet for calculation) Current price = 1,067.18

3. A Japanese company has a bond outstanding that sells for 106 percent of its ¥100,000 par value. The bond has a coupon rate of 2.8 percent paid annually and matures in 21 years. What is the yield to maturity of this bond? Coupon rate = 2.8% NPER = 21 Face Value = 100,000 PMT = 2,800 (100,000 * 0.028) Present Value of the bond = 100,000 * 106% = 106,000 Yield maturity (Excel using the formula “Rate”) = 2.43%

4. If Treasury bills are currently paying 3.9 percent and the inflation rate is 2.1 percent, what is the approximate real rate of interest? The exact real rate? Current rate = 3.9% Inflation = 2.1% Rate of return = 1.80% (3.90% - 2.1%) We know that (1+ R) = (1 + r) (1 + h) So, r = (1 + R)/ (1 + h) – 1 where R = current rate, r = real rate of return and h = inflation rate r = (1 + 0.039)/ (1 + 0.021) - 1 r = 1.76% 5. An investment offers a total return of 13 percent over the coming year. Alan Wingspan thinks the total real return on this investment will be only 8 percent. What does Alan believe the inflation rate will be over the next year? (1+ R) = (1 + r) (1 + h) h = (1+ R)/ (1 + r) -1 h = 4.63% 6. The Starr Co. just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. If investors

require a return of 11 percent on the stock, what is the current price? What will the price be in three years? In 15 years? Pt = Dt (1 + g)/ (R-g) Pt = $1.95 (1 + 0.045)/ (0.11 – 0.045) Pt = $2.0378/0.065 Pt = $31.351

7. The next dividend payment by ECY, Inc., will be $2.90 per share. The dividends are anticipated to maintain a growth rate of 5.5 percent, forever. If the stock currently sells for $53.10 per share, what is the required return? R = (D1/P0) + g R = ($2.90/$53.10)/ + 0.055 R = 10.96%

8. Shiller Corporation will pay a $2.75 per share dividend next year. The company pledges to increase its dividend by 5 percent per year, indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company’s stock today? P0 = D1/ (R- g) P0 = $2.75/ (0.11 – 0.05) P0 = $45.83 9. Ayden, Inc., has an issue of preferred stock outstanding that pays a $4.50 dividend every year, in perpetuity. If this issue currently sells for $87 per share, what is the required return? Rate of return = Dividend / Price Rate of return = $4.50/$87 Rate of return = 5.17%...