## finance-FI 3300 WebCT Take Home Problem Set 4 Fall 2015

FI 3300 WebCTTake Home Problem Set 4Fall 2015Directions: This problem set covers chapters 8, 9 and 10 in the textbook. Determine or compute an answerfor each question/problem. After you have computed an answer for every question, enter your answersonline via the âquizâ function entitled âTHPS-4 ANSWER SUBMISSION FORM.â See the coursecalendar for when the answer submission form will open and close. I will post a detailed solution key to theproblem set right after the Answer Submission Form closes. See the course calendar for the day(s) on whichI will answer questions about these problems in the chat room.This is a take-home, open book, open notes financial statement analysis problem set. Work on thisAssignment is to be yours alone – any discussion of either the questions on the assignment or youranswers with anyone other than your instructor will be considered as cheating and, thus, as aviolation of the GSU honor code.All questions are equally weighted._______________________________________________PART I: MULTIPLE CHOICE â Choose the letter of the most correct answer for each question.Record only one answer per question. Each question is worth 4 points.1. IS THE FOLLOWING STATEMENT TRUE or FALSE? âA financial security is simply a contractbetween the provider of funds and the user of these funds that clearly specifies the amount of moneythat has been provided and the terms and conditions of how the user is going to repay the provider.âa. Trueb. False2. A consol is a bond that:a. Pays a fixed annual coupon amount, and when originally issued, is set to mature in 30 years.b. Pays a fixed annual coupon amount, and when originally issued, is set to mature in 50 years.c. Does not pay an annual coupon (i.e., the annual coupon payment is $0) but when it matures paysout the par value of the bond.d. Pays a fixed annual coupon amount forever.e. Does not pay an annual coupon (i.e., the annual coupon payment is $0) and never matures.3. Convertible bonds:a. Allow the security holder to convert the bond into cash at any time during the life of the bond.b. Allow the security holder to convert the bond into products or services that the company sells.c. Allow the security holder to convert the bond to another security, usually equity, according to somepre-specified terms.d. Allow the security holder to convert the bond into another bond with a higher coupon rate if interestrates on bonds increase before the convertible bond matures.e. None of the above.4. The required return (using the constant growth dividend model) for a share of stock is equal to:a.b.c.d.e.Next yearâs dividend divided by the current price.The increase in the value of a share of stock over one year.The percentage rate at which a stock increases in value.The capital gains yield plus the dividend yield.The payment by a corporation to shareholders in the form of cash or stock.5. According to the constant growth in dividends price formula given in the textbook, if the dividend tobe paid one year from today decreases and all other factors remain constant, the price of the stock will__________; if the growth rate of all future dividends increases and all other factors remain constant,the price of the stock will __________; and if the required rate of return increases and all other factorsremain constant, the price of the stock will __________.a.b.c.d.e.Decrease; decrease; decreaseIncrease; increase; decreaseDecrease; increase; decreaseIncrease; increase; increaseNone of the answers listed above are correct.6. This morning, Mary bought a ten-year, $1000 par value bond with a 6.5% coupon rate and semi-annualpayments. She paid $994 for the bond. If the market interest rate on this type of bond increases to 7%tonight, how much will Mary receive for her first coupon payment?a.b.c.d.e.$32.50$35.00$65.00$69.58$70.007. Suppose that interest rates increase. Assuming all other parameters that impact the price of bonds andstocks remain constant, what would you expect to happen to bond and stock prices?a.b.c.d.e.Bond prices would increase and stock prices would decrease.Bond prices would decrease and stock prices would decrease.Bond prices would decrease and stock prices would increase.Bond prices would increase and stock prices would increase.Stock prices would increase. More information would be needed to determine the impact on bondprices.8. Which of the following bonds would have the smallest change in price (in percentage terms) for a givenchange in interest rates (that is, in yield to maturity) â that is, if the yield to maturity on a bond increasesfrom 8% to 10%, all else constant, which of the following bond prices will change the least (inpercentage terms)?a.b.c.d.e.A $1000 par value bond with a 10% coupon rate (annual payments) that matures in 2 years.A $1000 par value bond with a 10% coupon rate (semi-annual payments) that matures in 25 years.A $1000 par value bond with a 2% coupon rate (annual payments) that matures in 4 years.A $1000 par value bond with a 2% coupon rate (semi-annual payments) that matures in 30 years.The bond that changes the most (in price percentage terms) cannot be determined from theinformation given.9. Five years ago, ABC Inc. issued 25-year fixed coupon bonds at par. Since then the bondâs yield-tomaturity (YTM) has increased by 1.5%. Based on this information, which of the following is trueregarding the current market price of the bond?a.b.c.d.e.The bond is selling at discount.The bond is selling at premium.The bond is selling at book value.The bond is selling at par.Insufficient information.10. Assume that you have the following information on project A: (i) it will yield cash flows of $960 peryear forever; (ii) the IRR is 16%; (iii) the required rate of return is 11.35%.What is the NPV of thisproject?a.b.c.d.e.$8,458.15$2,382.45$2,242.88$2,458.15None of the numbers listed above are within $10 of the correct answer.11. Which of the following statements is most correct concerning a project with normal cash flows (i.e., acash outflow in Year 0 followed by cash inflows in all subsequent years)?a. If the NPV of a project is positive then the payback period rule will always accept the project.b. If the NPV of a project is negative, then the profitability index of the project will always be greaterthan one.c. If the profitability index of a project is greater than one, then the IRR will always be less than theprojectâs cost of capital.d. If the NPV of a project is zero, then the IRR of the project will be equal to the discount rate for theproject.e. If the discount rate of a project is zero, then the project will always be accepted.12. Consider the following projects, for a firm using a discount rate of 10%:ProjectABCDNPV$200,000$200,001$60,000$(235,000)IRR12.2%11%10.1%9%If the projects are independent, which, if any, project(s) should the firm accept?a.b.c.d.e.Project AProject BProject DProjects B and DProjects A, B and CPI1.041.011.61.9513. Consider the following projects, for a firm using a discount rate of 10%:ProjectABCDNPV$200,000$200,001$60,000$(235,000)IRR12.2%11%10.1%9%PI1.041.011.61.95If the projects are mutually exclusive, which, if any, project(s) should the firm accept?a.b.c.d.e.Project AProject BProject DProjects B and DProjects A, B and CPART II: PROBLEMS â Compute a final numerical answer for each of the following problems. Youshould work out your solutions on loose leaf paper, however, I may or may not collect your worked outsolutions. To be safe, however, I suggest that you write out a solution for every problem and be ready toturn it in if asked. Round all dollar answers to 2 decimal places and record all interest rate, coupon rate andgrowth rate answers as a percent rounded to one decimal place.14. The historical stock returns for GAF, Inc. are listed below:Year20052006200720082009201020112012Annual Stock Return12%18%38%-12%0%-18%15%27%What is the standard deviation of returns for GAF, Inc. stock over the 8 year time period? (Computethe standard deviation assuming this is a population of returns, not a sample â that is, use the proceduredescribed in the textbook for calculating the standard deviation of a series of stock returns).15. If the expected return on the market portfolio (i.e., Rm) is 15%, if the risk-free rate (i.e., Rf) is 4% andif the beta of Homton, Inc. stock is 1.75, what is the equilibrium expected rate of return on Homtonâsstock according to the Capital Asset Pricing Model?16. Compute the price of a $5,000 par value bond with a coupon rate of 7.5% (semi-annual payments) and19 years remaining to maturity. Assume that the current yield to maturity on the bond is 8.60%.17. Compute the yield to maturity of a $2,500 par value bond with a coupon rate of 7.5% (quarterlypayments â that is, four times per year) that matures in 25 years. The bond is currently selling for $3,265.18. What is the yield to maturity of a $1,000 par value bond with a coupon rate of 9.5% (semi-annualcoupon payments) that matures in 28 years assuming the bond is currently selling for $838.13?19. Two years ago, Phutki Corp. issued a $1,000 par value, 11 percent (annual payment) coupon bond. Atthe time the bond was issued it had 15 years to maturity. Currently this bond is selling for $1,000 inthe bond market. Phutki Corp. is now planning to issue a $1,000 par value bond with a coupon rate of9 percent (semi-annual payments) that will mature 25 years from today. Assuming that the riskiness ofthe new bond is the same as the previous bond (i.e., the YTM on the new bond is equal to the currentYTM on the previous bond), how much will investor’s pay for this new bond?20. Consider a Zerobond (i.e., a bond that pays no coupon payment, meaning that the coupon rate on thebond is 0%) with a par value of $1,000 that will mature exactly 12 years from today. The current YTMof this Zerobond is 5.2%. Two years ago the YTM of the same Zerobond was 4.6%. Calculate the dollarprice increase/decrease (2 decimal places) within the last two years. If the bond falls in price, enter youranswer on D2L as a negative value (i.e., put a minus sign before your number with no space betweenthe minus sign and the number). If the bond increases in price, record the dollar amount of the increase.21. The current price of a 20-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid everysix months, and the current yield to maturity on this bond 13.4 percent. Given these facts, what is theannual coupon rate on this bond?22. Compute the price of a companyâs stock that just paid a dividend of $3.52 (that is, D0 = 3.52), assumingthat the growth rate in dividends is expected to be 6.5% per year forever and that the required rate ofreturn on this stock is 15.5%.23. If shares of common stock of the Samson Co. offer an expected total return of 13% and if the growthrate in future dividends of the stock are expected to be 3% per year forever, what is the stockâs dividendyield (i.e., D1/P0)?24. The stock of Cabbor, Incorporated is trading at $70.00 per share. The company just paid a dividend of$5.00 per share (that is, D0 = 5.00). The growth rate in dividends is projected to be 6 percent per yearforever. What is Cabborâs cost of equity capital (that is, compute the required rate of return on thestock)?25. Phillips, Inc. just paid a dividend of $3.25 per share on its common stock (that is, D0 = 3.25). Investorsexpect the dividend to grow at 45% in years 1 and 2, they expect the dividend to grow at 25% in year3 and they expect that all future dividends (that is, dividends in years 4, 5, â¦, infinity) to grow at aconstant rate of 5% per year. If the cost of capital for Phillips, Inc. stock is 15%, what is the currentprice of the stock?26. IBIS Corporation has had dividends grow from $2.50 per share to $6.00 per share over the last 10 years(the $5.00 per share dividend was paid yesterday; that is, D0 = $6.00). This compounded annual growthrate in dividends is expected to continue into the future forever. If the current market price of IBISâsstock is $45.00 per share, what rate of return do investors expect to receive from buying IBIS stock?27. A firm will pay a dividend of $0 one year from today and $5.00 two years from today (that is, D1 = $0and D2 = 5.00). Thereafter, the dividend is expected to grow at a constant rate forever. The price of thisstock today is $100 and the required rate of return on the stock is 10%. What is the expected constantgrowth rate of the dividend stream from year 2 to infinity?28. Malcolm Manufacturing, Inc. just paid a $2.00 annual dividend (that is, D0 = 2.00). There will be nodividend payment for the next two years (i.e., at t = 1 and t = 2). In year three (t = 3), the dividend isexpected to be $5.00. The dividend will then grow at 10% annually for the next 3 years (i.e., at t = 4, t= 5 and t = 6) and thereafter (i.e., beginning at t = 7) dividends will grow at a rate of 3% annuallyforever. Assuming a required return of 14%, what is the current price of the stock?29. Consider a project with the following cash flows:Year t = 0t =1t=2t=3t=4???$7,500$12,500$15,000$17,500The Payback Period of this project is 2.5 years. The appropriate discount rate is 13%. Find the NetPresent Value of the project. (Note that the cash flow for t=0 is not provided to you â that is, you mustfirst solve for it).30. If the cost of capital for the project shown below is 3.5 percentage points less than the projectâs IRR(for example, if the projectâs IRR is 12%, the cost of capital is 8.5%), what is the NPV of the project?Year0123456Cash Flow($210,000)$40,000$50,000$60,000$60,000$70,000$70,000

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