Anonymous
timer Asked: Apr 10th, 2020

Question Description

a)Determine the required rate of return for each bond based on the information provided above.

b)Explain which bond you would buy.

a)Determine the expected rate of return, if the stock is held for one year.

b)Determine the required rate of return.

c)Based on your answers to parts (a) and (b), explain whether or not you would recommend to purchase Walmart’s common stock.

d)Compute Walmart’s P/E ratio from the information provided above. Explain what the P/E ratio indicates.


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BUS 311 Exam 2A Spring 2020 Name_____________________________________ 1. (10 pts) Suppose that you are considering the purchase of either a ten–year Treasury bond or a ten–year Walmart Inc. corporate bond. Below are current risk premiums. Maturity risk premium 1.00% Default risk premium 1.50% Real risk free rate .50% Seniority risk premium 3.00% Inflation premium 2.00% Liquidity premium 0.50% Currency exchange rate premium 3.00% Required: a) Determine the required rate of return for each bond based on the information provided above. b) Explain which bond you would buy. 2. (10 pts) The two basic choices for raising funds for an organization are debt and equity. When considering whether to raise either debt or equity, explain the significance of the following: a) Why debt can be more attractive than equity. b) How preferred stock is a hybrid security. 3. (10 pts) Explain what is meant by the weighted average cost of capital. Be sure to include in your discussion the optimal capital structure, the optimal capital budget, and the hurdle rate. 4. (10 pts) The following information relates to Walmart Inc. (WMT): Current market price of common stock 1–Year target estimate 10–Year Treasury bond rate Market risk premium Dividends per share of common stock Earnings per share Beta for Walmart Inc. $105.00 $130.00 1.00% 5.50% $2.16 $5.19 .43 Required: a) Determine the expected rate of return, if the stock is held for one year. b) Determine the required rate of return. c) Based on your answers to parts (a) and (b), explain whether or not you would recommend to purchase Walmart’s common stock. d) Compute Walmart’s P/E ratio from the information provided above. Explain what the P/E ratio indicates. BUS 311 Exam 2B Spring 2020 Name _________________________________ (8 pts.) 1. Crowder Corporation has an issue of preferred stock, which has a par value of $80 per share with a dividend rate of 9 percent. Required: a) If the market rate for this preferred stock were now 12 percent, what would be the value of the preferred stock? b) If the market rate for this preferred stock were now 8 percent, what would be the value of the preferred stock? c) Explain why the prices are different. (10 pts) 2. Twenty years-ago Goran Corp. issued 30-year bonds with a face value of $1,000. The coupon rate on these bonds is 8 percent paid semiannually. A current bondholder is considering selling the bond today. The market rate is now 12 percent. Required: a) Determine the price of the bond today. Show all computations. b) Explain why the amount you determined in part (a) is different from the par value of the bond. (10 pts) 3. Robinson Inc. is a fast growing technology company. Management projects rapid growth of 20 percent for the next four years. After that, a constant-growth rate of 6 percent is expected. The firm expects to pay its first dividend of $5.00 three years from now. Dividends will grow at the same rate as the firm and the required rate of return on stocks with similar risk is 20 percent. Required: a) Determine the current price per share. b) If the price of the stock is currently $ 40.00, would you recommend that the stock be purchased? Explain. (10 pts.) 4. On April 1st, you will buy a boat for $500,000. You will pay $200,000 in cash at the time of purchase and borrow the remaining amount from the bank. This loan will be paid in four equal annual installments that include both the principal and 10 percent interest on the declining balance. Required: a) Determine the amount of the annual payment. b) Determine the total dollars of interest that you will pay for this loan. c) Determine the amount of interest that is included in the first payment. It is not necessary to complete an amortization schedule. (10 pts.) 5. Your client is 25 years old and wishes to retire at age 65. At that time, your client wishes to have saved $2,000,000. You advise the client to set aside money every year for the next 40 years. This money will be invested in a fund that you believe will average 10% each year for the next 40 years. Required: a) How much will your client need to set aside for each payment into the fund in order to accumulate the $2,000,000 total? b) If your client’s life expectancy is age 80, how much can your client withdraw each year for the 15 years of retirement? The cost of money is 10%. (12 pts) 6. Bam Corporation is considering the following independent projects for the coming year. Their target capital structure is 60 percent debt and 40 percent equity. The after-tax cost of debt is 6 percent and the cost of equity is 15 percent. Expected Required Rate of Risk Project Investment Return Level A $13 million 17% High B 16 million 9 Low C 25 million 14 Average D 10 million 8 Low E 18 million 16 High Bam adjusts its WACC for risk by adding 2% to the WACC for high-risk projects and subtracting 1.0% for low-risk projects. Required: a) Determine the WACC for Bam Corporation. b) Determine which projects Bam Corporation should accept and what would be the dollar size of its capital budget. BUS 311 Topics for Exam 2 1. Time Value of Money FV = PV (IF1) Lump Sum Future Value PV = FV (IF2) Lump Sum Present Value FVA = R (IF3) Annuity Future Value PVA = R (IF4) Annuity Present Value 2. Risk / Required Rate of Return a. Layered / Textured Approach RRR = RRFR + IP + MRP + LP + DRP + SRP+… b. Capital Asset Pricing Model (CAPM) RRR= RF + (RM – RF) B c. If ERR > RRR ERR = Invest (𝑃,𝐸𝑂𝑃−𝑃,𝐵𝑂𝑃)+𝐷𝐼𝑉 𝑃,𝐵𝑂𝑃 3. Bonds and Equity a. Types of Bonds b. Preferred stock c. Common Stock / 3 rights d. Price of Bond Po = INT (IF4) + Prin (IF2) e. Price of Preferred Stock 𝐷𝐼𝑉 Po = 𝑅𝑅𝑅 f. Price of Common Stock present value of expected dividends + expected price when stock is sold 4. WACC – Weighted Average Cost of Capital a. WACC = (WD) x (KD) + (WE) x (KE) WD = Weight / Proportion of Capital Structure Which is Debt WE = Weight / Proportion of Capital Structure Which is Equity KD = Cost of Debt KE = Cost of Equity b. Optimal Capital Structure c. Optimal Capital Budget d. Golden Rule of Profit Maximization (Hurdle Rate) ...
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