i have 12 Finance questions

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zezbu

Business Finance

Western New England College

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i will attach the questions.

they are finance 214 questions.

the name of the book is (( CORPORATE FINANCE, 6th edition))

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1. Explain, in detail, the relationship between interest rates (i.e. yield to maturity) and bond prices. (5) 2. You are considering investing in shares of MacLeod Industries, which is currently trading at $50 per share, just paid a $4.40 dividend, and plans to maintain a 4.00% growth rate in its dividend. You also know that the expected return on the market is 14.00%. Should you purchase this stock, why or why not? (you must support your decision with numbers!) (9) 3. Coca Cola’s closing price on 11/20/18 was $49.38 per share on 11/20/17 Coke’s share price was $43.93. During the year Coke paid a dividend of $1.54 per share. What is the total return earned on Coca Cola over the last year? What is Coke’s dividend yield and capital gains yield over the year? (9) 4. Microtech Corporation is expanding rapidly, and it currently need to retain all of its earnings; hence it does not pay any dividends. However, investors expect Mircrotech to begin paying dividends, with the first dividend of $1.00 coming 3 years from today. The dividends should grow rapidly – at a rate of 50% per year – during years 4 and 5. After year 5, the company should grow at a constant rate of 8% per year. If the required return on the stock is 15%, what is the value of the stock today? 5. What is the term structure of interest rates, and what is the yield curve? Describe and draw a normal yield curve and an inverted yield curve. (5) 6. You purchased a 5-year annual interest coupon bond one year ago. Its coupon interest rate was 6% and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. You sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3% - What is your total benefit (gain or loss in dollars) from holding this bond? (9) 7. KL Airlines paid an annual dividend of $1.42 a share last month. The company is planning on paying $1.50, $1.75, and $1.80 a share over the next 3 years, respectively. After that, the dividend will be constant at $2 per share per year. What is the market price of this stock if the market rate of return is 10.5 percent? (9) 8. A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid semi-annually. If the current market price is $750, what is the yield to maturity for this bond? What would happen to this bond’s price if yield to maturity suddenly dropped to 3.5%? (9) 9. Ace Frisbee Corporation produces a good that is very mature in their product life cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3.00, a dividend in year 2 of $2.00, and a dividend in year 3 of $1.00. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the stock is 8%. How much is one share of Ace’s stock worth today? (9) 10. You are examining two bonds. Bond A is a 9.875 % coupon semi-annual bond that matures in 20 years. Bond B is a 20 year zero-coupon bond. The yield to maturity for each bond is 7.50% and the par value for each is $1,000. (9) a. For each bond indicate if it is a premium bond, discount bond, or par bond. b. What is the current price of each bond? c. Plot the price path for each bond from now until maturity. 11. You read in the Wall Street Journal today that the real risk free rate is 2.74%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums: Inflation Premium = 3.25%; Liquidity Premium = 0.6%; 10-year Maturity Risk Premium 1.8%; and Default Risk Premium = 2.15%. What is the rate on a 10-year US Treasury bond and what is the rate on a 10-year corporate bond? (9) 12. Shares of Home Depot common stock are currently selling for $169.05. The last annual dividend paid was $3.98 per share and its required rate of return is 8.50% percent. At what rate is the dividend growing? (9)
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Explanation & Answer

Attached.

1
1. Explain, in detail, the relationship between interest rates (i.e. yield to maturity) and bond
prices. (5)
Solution
There exists an inverse relationship between interest rates and bond prices, meaning that
when interest rates rise, bond prices fall and vice versa. This relationship is caused by the
opportunity cost concept. Ideally, investors often compare the returns that they are getting
on their investments to what they can earn if they invested somewhere else. Since bonds
have a fixed coupon rate, when interest rate changes, the bonds coupons could either
become more or less attractive to investors, for example, when interest rates increase above
the coupon rates, the bonds become less attractive to investors since they could get higher
returns elsewhere; therefore, bond prices will fall due to low demand of bonds. If interest
rates fall below the coupon rate, bonds become more attractive due to their higher relative
returns. This increases their demand and consequently, their prices increase since they are
more attractive to investors.

2. You are considering investing in shares of MacLeod Industries, which is currently trading
at $50 per share, just paid a $4.40 dividend, and plans to maintain a 4.00% growth rate in
its dividend. You also know that the expected return on the market is 14.00%. Should
you purchase this stock, why or why not? (you must support your decision with
numbers!) (9)

Solution
Using the dividend growth model, the price of a stock can be calculated as:
Stock price = D1/(r – g)
Where D1 = D0 (1 + g), r = expected return on the market, g = growth rate

4.40(1 + 0.04)
= $45.76
0.14 − 0.04
The market price of MacLeod Industries stock equals $50 while the intrinsic
value/book value as calculated above is $45.76. Since the market price is greater
than the intrinsic value the stock is overvalued. As an investor, when the market
price is higher than the intrinsic val...


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