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essentials of management
Essentials Of Financial Management 4th Edition Eugene F. Brigham, Joel F. Houston, Jun-Ming Hsu, Yoon Kee Koong, A. N. Bany-Ariffin - Solutions
What steps are taken to find a stock price using the corporate model?
Why might someone use the corporate valuation model for companies that have a history of paying dividends?
Write out the equation for free cash flows and explain it.
Explain what is meant by horizon (terminal) date and horizon (continuing) value.
Explain how one would find the value of a nonconstant growth stock.
9-21 YIELD TO MATURITY AND YIELD TO CALL Golden Services Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 11% annual coupon payment, and their current price is $1,175. The bonds may be called in 5 years at 109% of face value(Call price =
9-20 BOND RETURNS Last year Chen Xi purchased a $1,000 face value corpo-rate bond with an 11% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.79%. If Chen Xi sold the bond today for $1,060.49, what rate of return would she have
9-19 BOND VALUATION You are considering a 10-year, 51,000 par value bond.Its coupon rate is 9%, and interest is paid semiannually. If you require an"effective" annual interest rate (not a nominal rate) of 8.16%, how much should you be willing to pay for the bond?
9-18 BOND VALUATION Bond X is noncallable and has 20 years to maturity, a 9% annual coupon, and a $1,000 par value. Your required return on Bond X is 10%; if you buy it, you plan to hold it for 5 years. You (and the market)have expectations that in 5 years, the yield to maturity on a 15-year bond
9-17 EXPECTED INTEREST RATE Dragon Corporation's 14% coupon rate, semi-annual payment, $1,000 par value bonds, which mature in 30 years, are callable 5 years from today at $1,050. They sell at a price of $1,353.54, and the yield curve is flat, Assume that interest rates are expected to remain at
9-16 PRICE AND YIELD An 8% semiannual coupon bond matures in 5 years.The bond has a face value of $1,000 and a current yield of 8.21%. What are the bond's price and YTM? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 9.1.)
9-15 YIELD TO CALL It is now January 1, 2015, and you are considering the purchase of an outstanding bond that was issued on January 1, 2013. It has a 9.5% annual coupon and had a 30-year original maturity. (It matures on December 31, 2042.) There is 5 years of call protection (until December 31,
9-14 BOND YIELDS Last year Susuke Inc. issued a 10-year, 12% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 4 years at a price of $1,060 and it sells for $1,100.a. What are the bond's nominal yield to maturity and its nominal yield to call? Would an investor
9-13 BOND RETURNS Susan bought a bond with $1,000 par value when it has 8 years left until maturity at a price of $940. This bond pays a 6%annual coupon. Three years later, Susan sold this bond at price of $1,020.Calculate the rate of return she earned on this bond over her 3-year invest-ment
9-12 BOND'S CURRENT AND FUTURE PRICE Michael bought a bond with$1,000 par value paying a 5% annual coupon which has 7 years left until maturity, when its yield to maturity is 8%.a. Calculate the price Michael paid for the bond.b. If the yield curve is flat and rates remain the same, what would be
9-11 YIELD TO MATURITY, CURRENT YIELD, CAPITAL GAINS YIELD Nestera Corporation has outstanding bonds with $1,000 par value paying an 8% annual coupon with 10 years to maturity. The bond's price is $1,150.Calculate its yield to maturity, current yield, and capital gains yield.
9-10 CURRENT YIELD, CAPITAL GAINS YIELD, AND YIELD TO MATURITY Shanghai Textile Inc. has bonds outstanding with 9 years left to maturity.The bonds have an 8% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market
9-9 YIELD TO MATURITY Eastern Corporation bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.a. What is the yield to maturity at a current market price of (1) $829 and(2) $1,104?b. Would you pay $829 for each bond if you
9-8 YIELD TO CALL Six years ago the Pacific Company issued 20-year bonds with a 14% annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 years of call protection. Today Pacific called the bonds. Compute the realized rate of return for an investor who purchased the
9-7 INTEREST RATE SENSITIVITY An investor purchased the following 5 bonds. Each bond had a par value of $1,000 and an 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell, and each then had a new YTM of 7%. What is the percentage change in
9-6 BOND VALUATION An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 9.6%. Bond C pays a 10% annual coupon, while Bond Z is a zero coupon bond.a. Assuming that the yield to maturity of each bond
9-5 BOND VALUATION An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year.a. What will the value of each bond be if the going interest rate is 5%, 8%, and 12%? Assume that only one more
9-4 YIELD TO MATURITY A firm's bonds have a maturity of 10 years with a$1,000 face value, have an 8% semiannual coupon, are callable in 5 years at$1,050, and currently sell at a price of $1,100. What are their nominal yield to maturity and their nominal yield to call? What return should investors
9-3 BOND VALUATION Kyoto Corporation's outstanding bonds have a $1,000 par value, a 9% semiannual coupon, 8 years to maturity, and an 8.5% YTM.What is the bond's price?
9-2 YIELD TO MATURITY AND FUTURE PRICE A bond has a $1,000 par value, 10 years to maturity, and a 7% annual coupon and sells for $985.a. What is its yield to maturity (YTM)?b. Assume that the yield to maturity remains constant for the next three years. What will the price be 3 years from today?
9-1 BOND VALUATION Asiana Fashion's bonds have 10 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 8%; and the yield to maturity is 9%. What is the bond's current market price?
9-17 Which of the bonds has the most reinvestment risk? Explain your answer. (Hint: Refer to Table 9.2.)a. 7-year bonds with a 5% coupon.b. 1-year bonds with a 12% coupon.c. 3-year bonds with a 5% coupon.d. 15-year zero coupon bonds.e. 15-year bonds with a 10% coupon.
9-16 Which of the following bonds has the most price risk? Explain your answer. (Hint: Refer to Table 9.2.)a. 7-year bonds with a 5% coupon.b. 1-year bonds with a 12% coupon.c. 3-year bonds with a 5% coupon.d. 15-year zero coupon bonds.e. 15-year bonds with a 10% coupon.
9-15 A bond's expected return is sometimes estimated by its YTM and some-times by its YTC. Under what conditions would the YTM provide a better estimate, and when would the YTC be better?
9-14 Would the yield spread on a corporate bond over a Treasury bond with the same maturity tend to become wider or narrower if the economy appeared to be heading toward a recession? Would the change in the spread for a given company be affected by the firm's credit strength? Explain.
9-13 Explain whether the following statement is true or false: Only weak companies issue debentures.
9-12 Why are convertibles and bonds with warrants typically offered with lower coupons than similarly rated straight bonds?
9-11 What's the difference between a call for sinking fund purposes and a refunding call?
9-10 Are securities that provide for a sinking fund more or less risky from the bondholder's perspective than those without this type of provision?Explain.
9-9 Why is a call provision advantageous to a bond issuer? When would the issuer be likely to initiate a refunding call?
9-8 Indicate whether each of the following actions will increase or decrease a bond's yield to maturity:a. The bond's price increases.b. The bond is downgraded by the rating agencies.c. A change in the bankruptcy code makes it more difficult for bondholders to receive payments in the event the firm
9-7 Assume that you have a short investment horizon (less than 1 year). You are considering two investments: a 1-year Treasury security and a 20-year Treasury security. Which of the two investments would you view as being riskier? Explain.
9-6 If you buy a callable bond and interest rates decline, will the value of your bond rise by as much as it would have risen if the bond had not been call-able? Explain.
9-5 Discuss the following statement: A bond's yield to maturity is the bond's promised rate of return, which equals its expected rate of return.
9.4 If interest rates rise after a bond issue, what will happen to the bond's price and YTM? Does the time to maturity affect the extent to which interest rate changes affect the bond's price? (Again, an example might help you answer this question.)
9-3 The values of outstanding bonds change whenever the going rate of interest changes. In general, short-term interest rates are more volatile than long-term interest rates. Therefore, short-term bond prices are more sensitive to interest rate changes than are long-term bond prices.Is that
9-2 Can the following equation be used to find the value of a bond with N years to maturity that pays interest once a year? Assume that the bond was issued several years ago.- Annual interest Par value(1+r)(1+1.)"
9-1 A sinking fund can be set up in one of two ways:. The corporation makes annual payments to the trustee, who invests the proceeds in securities (frequently government bonds) and uses the accumulated total to retire the bond issue at maturity.The trustee uses the annual payments to retire a
ST-3 SINKING FUND The Vancouver Development Company (VDC) is planning to sell a $100 million, 10-year, 12%, semiannual payment bond issue. Provisions for a sinking fund to retire the issue over its life will be included in the indenture. Sinking fund payments will be made at the end of each year,
ST-2 BOND VALUATION The Pennington Corporation issued a new series of bonds on January 1, 1991. The bonds were sold at par ($1,000); had a 12%coupon; and mature in 30 years, on December 31, 2020. Coupon payments are made semiannually (on June 30 and December 31).a. What was the YTM on January 1,
ST-1 KEY TERMS Define each of the following terms:a. Bond; treasury bond; corporate bond; municipal bond; foreign bondb. Par value; maturity date; original maturityc. Coupon payment; coupon interest rated. Fixed-rate bond; floating-rate bond; zero coupon bond; original issue discount (OID) bond
8. Repeat the same exercise for each of the three remaining companies. Do the reported betas confirm your earlier intuition? In general, do you find that the higher-beta stocks tend to do better in up markets and worse in down markets? Explain.
7. Assume that the risk-free rate is 4% and themarket risk premiumis 5%. What is the required return on the company's stock?
6.What is the company's current dividend yield? What has been its total return to investors over the past year? Over the past 3 years? (Remember that total return includes the dividend yield plus any capital gains or losses.) You will have to go to more than one website to find this information.
5. Go back to the summary page to see an estimate of the company's beta. What is the company's beta?What was the source of the estimated beta? Realize that if you go to another website, the beta shown could be different due to measurement differences.
4. Select one of the four stocks listed in Question 3 by entering the company's ticker symbol on the financial website you have chosen. On the screen you should see the interactive chart. Select the six-month time period and select the S&P 500, so the stock's performance will be compared to the S&P
3.Now let's take a closer look at the stocks of four companies: Colgate Palmolive (Ticker = CL), Campbell Soup (CPB), Motorola Solutions (MSI), and Tiffany & Co (TIF). Before looking at the data, which of these companies would you expect to have a relatively high beta (greater than 1.0)and which of
2.On the summary screen, you should see an interactive chart. Typically, you can chart performance over the last 24 hours, 1 month, three months, six months-up to 10 years, or even longer. Select different time periods and watch how the graph changes. On this screen you should also see a menu to
1. Begin by looking at the historical performance of the overall stock market. Typically, on most of the financial websites you can enter S&P 500 and go right to the index's summary page. You will see a quick summary of the market's performance over the past 24 hours and 12 months. How has the
8-21 SECURITY MARKET LINE You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks:Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-free rate is 6%, and you believe the following probability distribution for
8-20 REALIZED RATES OF RETURN Stocks A and B have the following historical returns:a. Calculate the average rate of return for each stock during the period 2010 through 2014.b. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would the realized rate of
8-19 EVALUATING RISK AND RETURN Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6%, and the market risk premium is
5.How might your decision be affected if, rather than buying one stock for $0.5 million, you could construct a portfolio consisting of 100 stocks with $5,000 invested in each? Each of these stocks has the same return characteristics as the one stock-that is, a 50-50 chance of being worth zero or
4.Exactly how large would the expected profit (or the expected rate of return) have to be on the stock investment to make you invest in the stock, given the 7.5% return on the bond?
3.Would you invest in the bond or the stock? Why?
2.The expected rate of return on the T-bond investment is 7.5%What is the expected rate of return on the stock investment?
1.The expected profit on the T-bond investment is $37,500. What is the expected dollar profit on the stock investment?
8-18 EXPECTED RETURNS Suppose you won the lottery and had two options: (1) receiving $0.5 million or (2) taking a gamble in which, at the flip of a coin, you receive $1 million if a head comes up but receive zero if a tail comes up.a. What is the expected value of the gamble?b. Would you take the
8-17 PORTFOLIO BETA Suppose you are the manager of a mutual fund and hold a $10 million stock portfolio with a beta of 1.3. The required market risk premium is 7% and the risk-free rate is 4%. You expect to invest an additional fund of $5 million in a number of stocks and the final required return
8-16 CAPM AND PORTFOLIO RETURN You have been managing a $5 million portfolio that has a beta of 1.25 and a required rate of return of 12%. The current risk-free rate is 5.25%. Assume that you receive another $500,000.If you invest the money in a stock with a beta of 0.75, what will be the required
8-15 CAPM AND REQUIRED RETURN AM Inc. has a beta of 1.4 and PM Inc. has a beta of 0.7. The required market return is 16% and the risk-free rate is 7%.After the financial crisis, the expected rate of inflation built into risk-free rate falls by 2 percentage points and the required market return
8-14 PORTFOLIO BETA Suppose you held a diversified portfolio consisting of a$7,500 investment in each of 20 different common stocks. The portfolio's beta is 1.12. Now suppose you decided to sell one of the stocks in your portfolio with a beta of 1.0 for $7,500 and use the proceeds to buy another
8-13 CAPM, PORTFOLIO RISK, AND RETURN Consider the following informa-tion for Stocks X, Y, and Z. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the corre-lation coefficients is between 0 and 1.)Fund Q has one-third of its funds
8-12 REQUIRED RATE OF RETURN Suppose r ., = 9%, r ., = 14%, andb, = 1.3.a. What is r ,, the required rate of return on Stock i?b. Now suppose that r ., (1) increases to 10% or (2) decreases to 8%.The slope of the SML remains constant. How would this affect r.and r?c. Now assume that r ., remains at
8-11 CAPM AND REQUIRED RETURN Calculate the required rate of return for Manning Enterprises assuming that investors expect a 3.5% rate of infla-tion in the future. The real risk-free rate is 2.5%, and the market risk premium is 6.5%. Manning has a beta of 1.7, and its realized rate of return has
8-10 CAPM AND REQUIRED RETURN Bradford Manufacturing Company has a beta of 1.45, and Farley Industries has a beta of 0.85. The required return on an index fund that holds the entire stock market is 12.0%. The risk-free rate of interest is 5%. By how much does Bradford's required return exceed
8-9 REQUIRED RATE OF RETURN The stock of J-Axis Co. has a beta of 1.2 and the stock of YSL Co. has a beta of 0.7. If the required market return is 14%and the risk-free rate is 6%, by how much does the required return on the riskier stock exceed the required return on the less risky stock?
8-8 BETA COEFFICIENT Given the following information, determine the beta coefficient for Stock J that is consistent with equilibrium: f = 12.5%;RF = 4.5%; r = 10.5%.
8-7 PORTFOLIO REQUIRED RETURN Jack is the manager of a $10 million mutual fund and he decides to invest in the three stocks with the following amounts and betas.If the required market return is 12% and the risk-free rate is 4%, what is the fund's required rate of return? Stock Invested amount Beta
8-6 EXPECTED RETURNS Stocks X and Y have the following probability distri-butions of expected future returns:Calculate the expected rate of return, f ., for Stock Y (f. = 12%).a.b.Calculate the standard deviation of expected returns, o ., for Stock X (o, = 20.35%). Now calculate the coefficient of
8-5 BETA AND REQUIRED RATE OF RETURN The stock of Orange Inc. has a required rate of return of 14%, the required return on the market is 11%, and the risk-free rate is 5%.a. What is the market risk premium?b. What is the stock's beta?c. If the required return on the market increased to 12%, what
8-4 EXPECTED AND REQUIRED RATES OF RETURN Assume that the risk-free rate is 5% and the market risk premium is 6%. What is the required return for the overall stock market? What is the required rate of return on a stock with a beta of 1.2?
8-3 REQUIRED RATE OF RETURN Assume that the required rate of return on the market portfolio is 15% and the risk-free rate is 7%. What is the required rate of return on a stock with a beta of 1.2?
8-2 PORTFOLIO BETA An individual has $35,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a beta of 1.4. If these are the only two investments in her portfolio, what is her portfolio's beta?
8-1 EXPECTED RETURN A stock's returns have the following distribution:Calculate the stock's expected return, standard deviation, and coefficient of variation. State of Economy Probability of Being in This State Boom 0.1 Above normal 0.2 Rate of Return in This State 50% 30 Normal 0.3 15 Below normal
8-9 In Chapter 9, we will see that if the market interest rate, r., for a given bond increased, the price of the bond would decline. Applying this same logic to stocks, explain (a) how a decrease in risk aversion would affect stocks' prices and earned rates of return, (b) how this would affect risk
8-8 If a company's beta were to double, would its required return also double?
8-7 If investors' aversion to risk increased, would the risk premium on a high-beta stock increase by more or less than that on a low-beta stock?Explain.
8-6 A stock had a 12% return last year, a year when the overall stock market declined. Does this mean that the stock has a negative beta and thus very little risk if held in a portfolio? Explain.
8-5 Stock A has an expected return of 7%, a standard deviation of expected returns of 35%, a correlation coefficient with the market of -0.3, and a beta coefficient of -0.5. Stock B has an expected return of 12%, a standard deviation of returns of 10%, a 0.7 correlation with the market, and a beta
8-4 Is it possible to construct a portfolio of real-world stocks that has a required return equal to the risk-free rate? Explain.
8-3 A life insurance policy is a financial asset, with the premiums paid repre-senting the investment's cost.a. How would you calculate the expected return on a 1-year life insurance policy?b. Suppose the owner of a life insurance policy has no other financial assets-the person's only other asset
8-2 The probability distribution of a less risky expected return is more peaked than that of a riskier return. What shape would the probability distribu-tion be for (a) completely certain returns and (b) completely uncertain returns?
8-1 Suppose you owned a portfolio consisting of $250,000 of long-term U.S. government bonds.a. Would your portfolio be riskless? Explain.b. Now suppose the portfolio consists of $250,000 of 30-day Treasury bills. Every 30 days your bills mature, and you will reinvest the principal $250,000 in a new
ST-3 BETA AND THE REQUIRED RATE OF RETURN ECRI Corporation is a holding company with four main subsidiaries. The percentage of its capital invested in each of the subsidiaries (and their respective betas) are as follows:a. What is the holding company's beta?b. If the risk-free rate is 6% and the
ST-2 REALIZED RATES OF RETURN Stocks A and B have the following historical returns:a. Calculate the average rate of return for each stock during the period 2010 through 2014. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would the realized rate of return
ST-1 KEY TERMS Define each of the following terms using graphs or equations to illustrate your answers whenever feasible:a. Risk; stand-alone risk; probability distributionb. Expected rate of return, îc. Standard deviation, o; coefficient of variation (CV)d. Risk aversion; risk premium (RP);
An investor has a two-stock portfolio with $25,000 invested in Stock X and $50,000 invested in Stock Y. X's beta is 1.50, and Y's beta is 0.60. What is the beta of the investor's portfolio? (0.90)
Why is it argued that beta is the best measure of a stock's risk?
What is an average-risk stock? What is the beta of such a stock?
In general, can the riskiness of a portfolio be reduced to zero by increasing the number of stocks in the portfolio? Explain.
What is meant by perfect positive correlation, perfect negative correlation, and zero correlation?
Explain the following statement: An asset held as part of a portfolio is generally less risky than the same asset held in isolation.
An investment has a 50% chance of producing a 20% return, a 25% chance of producing an 8% return, and a 25% chance of producing a -12% return. What is its expected return? (9%)
How does risk aversion affect rates of return?
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