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Financial Management Principals And Applications 11th Edition Sheridan Titman, John D Martin, Arthur J Keown - Solutions
How does a firm's dividend policy affect the firm's P/E ratio?
What is the price/earnings model of equity valuation?
If a corporation decides to retain its earnings and reinvest them in the firm, does the market value of the firm's shares always increase? Why or why not?
Describe the three-step process for valuing common stock using the discounted dividend model.
What does agency cost mean with respect to the owners of a firm's common stock?
What are the attributes of common stock that distinguish it from bonds and preferred stock?
Which one(s) of the bonds (if any) would you recommend to your grandfather? Explain.
What are some of the things you can conclude from these computations?
How would the values ofthe bonds change if(i) the market’s required yield to maturity on a comparable risk bond (r) in¬creases 3 percentage points or (ii) decreases 3 percentage points? Which of the bond issues is the most sensitive to changes in the rate of interest?
Given your estimate ofthe proper discount rate, what is your estimate of the value of each of the bonds? In light of the prices recorded above, which issue do you think is most at¬tractively priced?
The bond issues are currently selling for the following amounts:Young Corp. $1,030 Thomas Resorts $ 973 Entertainment, Inc. $1,035 What is the yield to maturity for each bond?
Estimate an appropriate market’s required yield to maturity for each of the bond issues using the table of credit spreads reported in Table 9.4.
(Inflation and interest rates) What would you expect the nominal rate of interest to be if the real rate is 5 percent and the expected inflation rate is 3 percent?
(Inflation and interest rates) Assume the expected inflation rate is 3.8 percent. If the current real rate of interest is 6.4 percent, what should the nominal rate of interest be?
(Related to Checkpoint 9.6 on page 287) (Inflation and interest rates) What would you expect the nominal rate of interest to be if the real rate is 4.5 percent and the expected inflation rate is 7.3 percent?
(Bond valuation relationships) Stanley, Inc. issues 15-year $1,000 bonds that pay $85 annually. The market price for the bonds is $960. The market’s required yield to maturity on a comparable risk bond is 9 percent.a. What is the value of the bond to you?b. What happens to the value if the
(Bond valuation relationships) Visador Corporation bonds pay $70 in annual interest, with a $1,000 par value. The bonds mature in 17 years. The market’s required yield to maturity on a comparable risk bond is 8.5 percent.a. Calculate the value of the bond.b. How does the value change if the
(Bond valuation relationships) Telink Corporation bonds pay $110 in annual interest, with a $1,000 par value. The bonds mature in 20 years. The market’s required yield to maturity on a comparable risk bond is 9 percent.a. Calculate the value of the bond.b. How does the value change if (i) the
(Bond valuation relationships) Arizona Public Utilities issued a bond that pays $80 in interest, with a $1,000 par value. It matures in 20 years. The market’s required yield to maturity on a comparable risk bond is 7 percent.a. Calculate the value of the bond.b. How does the value change if the
(Related to Checkpoint 9.3 on page 274) (Bond valuation relationships) You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 15 years.The market’s required yield to maturity on a comparable risk bond is 12 percent.a. Calculate the value of the bond.b. How does
(Related to Checkpoint 9.2 on page 270 and Checkpoint 9.3 on page 274) (Bond valuation relationships) Waco Industries 15-year, $1,000 par value bonds pay 8 percent interest annually. The market price of the bonds is $1,085, and the market’s required yield to maturity on a comparable risk bond is
(Related to Checkpoint 9.2 on page 270) (Yield to maturity) The Saleemi Corporation’s$1,000 bonds pay 5 percent interest annually and have 12 years until maturity. You can purchase the bond for $915.a. What is the yield to maturity on this bond?b. Should you purchase the bond if the yield to
(Related to Checkpoint 9.2 on page 270 and Checkpoint 9.3 on page 274) (Bond valuation) Vail Inc.’s seven-year $1,000 par bonds pay 9 percent interest. The market’s required yield to maturity on a comparable risk bond is 7 percent. The current market price for the bond is $1,100.a. Determine
(Related to Checkpoint 9.2 on page 270) (Yield to maturity) Abner Corporation’s bonds mature in 15 years and pay 9 percent interest annually. If you purchase the bonds for$1,250, what is your yield to maturity?
(Related to Checkpoint 9.2 on page 270 and Checkpoint 9.3 on page 274) (Bond valuation) Fingen’s 14-year, $1,000 par value bonds pay 9 percent interest annually.The market price of the bonds is $1,100 and the market’s required yield to maturity on a comparable risk bond is 10 percent.a. Compute
(Related to Checkpoint 9.2 on page 270) (Yield to maturity) Hoyden Co.’s bonds mature in 15 years and pay 8 percent interest annually. If you purchase the bonds for$1,175, what is their yield to maturity?
(Bond valuation) Five years ago XYZ International issued some 30-year zero coupon bonds that were priced with a market’s required yield to maturity of 8%. What did these bonds sell for when they were issued? Now that five years have passed and the market’s required yield to maturity on these
(Related to Checkpoint 9.3 on page 274) (Bond valuation) Doisneau 20-year bonds have a 10 percent annual coupon interest, make interest payments on a semiannual basis, and have a $1,000 par value. If the bonds are trading with a 12% market’s required yield to maturity, is the bond a premium or
(Yield to maturity) Fitzgerald’s 20-year bonds pay 9 percent interest annually on a$1,000 par value. If bonds sell at $945, what is the bond’s yield to maturity? What would be the yield to maturity if the bonds paid interest semiannually? Explain the difference.
(Yield to maturity) A bond’s market price is $750. It has a $1,000 par value, will mature in eight years, and has a coupon interest rate of 9 percent annual interest, but makes its interest payments semiannually. What is the bond’s yield to maturity? What happens to the bond’s yield to
(Related to Checkpoint 9.2 on page 270) (Yield to maturity) The market price is $900 for a 10-year bond ($1,000 par value) that pays 8 percent annual interest, but makes interest payments on a semiannual basis (4 percent semiannually). What is the bond’s yield to maturity?
(Related to Checkpoint 9.3 on page 274) (Bond valuation) Pybus, Inc. is considering issuing bonds that will mature in 20 years with an 8 percent annual coupon rate. Their par value will be $1,000, and the interest will be paid semiannually. Pybus is hoping to get a AA rating on its bonds and, if it
(Bond valuation) Enterprise, Inc. bonds have a 9% annual coupon rate. The interest is paid semiannually and the bonds mature in eight years. Their par value is $1,000. If the market’s required yield to maturity on a comparable risk bond is 8%, what is the value of the bond? What is its value if
(Related to Checkpoint 9.4 on page 276) (Bond valuation) Calculate the value of a bond that matures in 10 years and has a $1,000 par value. The annual coupon interest rate is 9 percent and the market’s required yield to maturity on a comparable risk bond is 15%.What would be the value of this
(Related to Checkpoint 9.3 on page 274) (Bond valuation) Calculate the value of a bond that matures in 12 years and has a $1,000 par value. The coupon interest rate is 8% and the market’s required yield to maturity on a comparable risk bond is 12%.
(Floating rate loans) After looking at a fixed rate loan, Ace-Campbell Mfg. entered into a floating rate loan agreement. This loan is set at 40 basis points (or .40%) over an index based on LIBOR. Ace-Campbell is concerned that the LIBOR index may go up, causing the loan to climb. That concern
(Related to Checkpoint 9.1 on page 264) (Floating rate loans) The Bensington Glass Company entered into a loan agreement with the firm’s bank to finance the firm’s working capital. The loan called for a floating rate that was 30 basis points (.30%) over an index based on LIBOR. In addition, the
(Related to Finance in a Flat World: International Bonds on page 284) In the feature titled Finance in a Flat World: International Bonds we learn about the bonds issued in financial markets outside of the U.S. What are the potential benefits and costs of investing in foreign issue bonds?
How does inflation impact the rate of interest observed in financial markets?
Is the price of a long-term (longer maturity) bond more or less sensitive to changes in interest rates than that of a short-term bond? Why?
Why does the market value of a bond differ from its par value when the coupon interest rate does not equal the market yield to maturity on a comparable risk bond?
Distinguish between the following:a. Debentures and mortgage bonds.b. Eurobonds, zero coupon bonds, and junk bonds.c. Premium and discount bonds.
What does a bond rating reflect? Why is the rating important to the firm’s management?
What is the difference between the expected and promised yield to maturity on a bond?
Distinguish between a bond’s coupon interest rate, current yield, and yield to maturity.
Why does a bond’s par or face value differ from its market value?
(Related to The Business of Life: Adjustable Rate Mortgages on page 266) In the feature titled The Business ofLife: Adjustable Rate Mortgages we learn the difference between a fixed- and adjustable-rate mortgage. Why would you ever want to use an adjustablerate mortgage (ARM)?
Describe the relationship between yield to maturity and the value of a bond.
What is a floating rate bond?
Distinguish between public and private corporate debt.
(Related to Regardless of Your Major: Borrow Now, Pay Later on page 262) In the feature titled Regardless ofYour Major the suggestion is made that you may already be involved in the debt markets. List your current involvement in the debt markets. Do you have credit cards, a car loan, or a college
What is the typical shape of the yield curve for U.S. Treasury securities?
What is the yield curve?
What are junk bonds and why do they typically have a higher interest rate than other types of bonds?
How does an investor receive a return from a zero or very low coupon bond?
What is the difference between debentures, subordinated debentures, and mortgage bonds?
As the maturity date of a bond approaches, what happens to the price of a discount bond? Is the result the same if the bond is a premium bond?
Why does a bond sell at a premium when the coupon rate is higher than the market's yield to maturity on a similar bond and vice versa?
As interest rates increase, why does the price of a long-term bond decrease more than the price of a short-term bond?
Explain the relationship between bond value and the bond's yield to maturity.
How do semiannual interest payments affect the asset valuation equation?
Why might the expected returns be different from the yield to maturity?
How do you estimate the appropriate discount rate?
How do you calculate the value of a bond?
What is the expected rate ofreturn for the fund based on the Capital Asset Pricing Model?
What is the reward-to-risk ratio for the fund based on the fund’s standard deviation as a measure of risk?
What are the expected rate ofreturn and standard deviation?
(Capital asset pricing model) Grace Corporation is considering the following investments. The current rate on Treasury bills is 2.5 percent and the expected return for the market is 9 percent.a. Using the CAPM, what rates of return should Grace require for each individual security?b. How would your
(Capital asset pricing model) Anita, Inc. is considering the following investments. The current rate on Treasury bills is 4.5 percent, and the expected return for the market is 11 percent. Using the CAPM, what rates of return should Anita require for each individual security?
(Portfolio beta and security market line) You own a portfolio consisting of the following stocks:The risk-free rate is 4 percent. Also, the expected return on the market portfolio is 10 percent.a. Calculate the expected return of your portfolio. (Hint: The expected return of a portfolio equals the
(Security market line) If the risk-free rate of return is 4% and the expected rate of return on the market portfolio is 10%,a. Graph the Security Market Line (SML). Also, calculate and label the market risk premium on the graph.b. Using your graph from questiona, identify the expected rates of
(Portfolio beta and CAPM) You are putting together a portfolio made up of four different stocks. However, you are considering two possible weightings:a. What is the beta on each portfolio?b. Which portfolio is riskier?c. If the risk-free rate of interest were 4% and the market risk premium were 5%,
(Security market line) You are considering the construction of a portfolio comprised of equal investments in each of four different stocks. The betas for each stock are found on the next page:a. What is the portfolio beta for your proposed investment portfolio?b. How would a 25% increase in the
(Security market line) Your father just learned from his financial advisor that his retirement portfolio has a beta of 1.80. He has turned to you to explain to him what this means. Specifically, describe what you would expect to happen to the value of his retirement fund if the following were to
Exxos have betas of .864, .693, and .575, respectively. What are the appropriate expected rates of return for the three securities?(Portfolio beta and security market line) You own a portfolio consisting of the following stocks:The risk-free rate is 3 percent. Also, the expected return on the
(Capital asset pricing model) The expected return for the general market is 10.3 percent, and the risk premium in the market is 5.3 percent. Tasac.o, LBM, and
(Capital asset pricing model) ,CSB, Inc. has a beta of .765. If the expected market return is 10.5 percent and the risk-free rate is 3.5 percent, what is the appropriate expected rate of return of CSB (using the CAPM)?
(Capital asset pricing model) Breckenridge, Inc., has a beta of .85. If the expected market return is 10.5 percent and the risk-free rate is 3.5 percent, what is the appropriate expected return of Breckenridge (using the CAPM)?
(Capital asset pricing model) Bobbi Manufacturing, Inc., is considering several investments. The rate on Treasury bills is currently 3.75 percent, and the expected return for the market is 10 percent. What should be the expected rates of return for each investment (using the CAPM)?
(Capital asset pricing model) Johnson Manufacturing, Inc., is considering several investments. The rate on Treasury bills is currently 4 percent, and the expected return for the market is 10 percent. What should be the the expected rates of return for each investment (using the CAPM)?
(Expected rate of return using CAPM)a. Compute the expected rate of return for Acer common stock, which has a 1.5 beta.The risk-free rate is 4.5 percent and the market portfolio (composed of New York Stock Exchange stocks) has an expected return of 10 percent.b. Why is the rate you computed the
(Expected rate of return using CAPM)a. Compute the expected rate of return for Intel common stock, which has a 1.2 beta.The risk-free rate is 3.5 percent and the market portfolio (composed of New York Stock Exchange stocks) has an expected return of 16 percent.b. Why is the rate you computed the
(Security market line) James Fromholtz from problem 8-1 is evaluating the investment posed in that problem and wants to apply his recently acquired understanding of the security market line concept to his analysis.a. If the risk-free rate of interest is currently 2.5%, and the beta for the
(CAPM and expected returns)a. Given the following holding-period returns, compute the average returns and the standard deviations for the Zemin Corporation and for the market.b. If Zemin’s beta is 1.54 and the risk-free rate is 4 percent, what would be an expected return for an investor owning
(Related to Checkpoint 8.3 on page 244) (CAPM and expected returns)a. Given the following holding-period returns, compute the average returns and the standard deviations for the Sugita Corporation and for the market.b. If Sugita’s beta is 1.18 and the risk-free rate is 4 percent, what would be an
(Estimating Betas) Consider the following stock returns for B&A Trucking, Inc. and the market index:
(Related to Checkpoint 8.3 on page 244) (Systematic risk and expected rates of return) Table 8.1 contains beta coefficient estimates for six firms and from two different sources. Calculate the expected increase in the value of each firm’s shares if the market portfolio were to increase by 10%
(Expected rate of return and risk) Kelly B. Stites, Inc., is considering an investment in one of two portfolios. Given the information that follows, which investment is better, based on risk (as measured by the standard deviation) and the expected rate of return?
(Portfolio expected rate of return) Barry Swifter is 60 years of age and considering retirement. Barry’s retirement portfolio currently is valued at $750,000 and is allocated in Treasury bills, an S&P 500 Index Fund, and an Emerging Market Fund as follows:a. Based on the current portfolio
(Related to Checkpoint 8.1 on page 230) (Portfolio expected rate of return) Penny Francis inherited a $100,000 portfolio of investments from her grandparents when she turned 21 years of age. The portfolio is comprised of the following three investments:a. Based on the current portfolio composition
(Computing the standard deviation for a portfolio of two risky investments)Answer the following questions using the information provided in problem 8-3 above:a. Answer question a of problem 8-3 where Mary decides to invest 10% of her money in Firm A’s common stock and 90% in Firm B’s common
(Computing the standard deviation for a portfolio of two risky investments) Mary Guilott recently graduated from college and is evaluating an investment in two companys’common stock. She has collected the following information about the common stock of Firm A and Firm B:a. If Mary invests half
(Related to Checkpoint 8.2 on page 235) Computing the standard deviation for an individual investment) Calculate the standard deviation in the anticipated returns found in Problem 8-1,
(Related to Checkpoint 8.1 on page 230) (Expected rate of return) James Fromholtz is considering whether to invest in a newly formed investment fund. The fund’s investment objective is to acquire home mortgage securities at what it hopes will be bargain prices.The fund sponsor has suggested to
If a company’s beta jumped from 1.5 to 4.5, would its expected rate of return triple?Explain why or why not (hint: assume the risk-free rate is 4% and the market risk premium is 5%).
True or false: If the standard deviation of Company A’s stock returns is greater than the standard deviation of Company B’s stock returns, then the beta of Stock A must be greater than the beta on Stock B. Explain your answer.
Presently you own shares of stock in company A and are considering adding some shares in either company B or company C. The standard deviations of all three firms are exactly the same but the correlation between the common stock returns for company A and company B is .5, while it is —.5 between
Why would we expect the reward-to-risk ratio (slope of the security market line) to be the same across all risky investments? Assume that you are able to earn 5% per unit of risk for investing in the stock of Company A and 7% for investing in Company B. How would you expect investors to act in
Describe what the capital asset pricing model tells you to your father, who has never had a course in finance. What is the key insight we gain from this model?
What is the security market line? What do the slope and intercept of this fine represent?
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