1.A 30-year bond pays interest semiannually, has a par value of $1,000, a coupon rate of 3.2%, and has 29 years until maturity. Bonds of competitors with similar risk are discounted at a market rate of 7%.What is the intrinsic price of the bond?

2.A 30-year bond matures in 7 years sells for $1,000 pays interest semiannually, a face value of $1,000 and has a coupon rate of 10.5%.(5 pts)What is the bond's current yield?(5 pts)What is the bond's yield to maturity?

3.Acme paid a $2-per-share dividend yesterday. Its dividends are expected todeclinesteadily at 3% per year, indefinitely.(10 pts)If the appropriate discount rate for Acme's stock is 12%, what is your estimate of its current price (P_o)?

Table below to be used with problem #4 below:

Variable

Value

Explanation

Dividend growth estimate

5%, 3%

5% for 2 years (annual estimate) and 3% per year indefinitely thereafter.

Current dividend

$1.00

Dividend paid to the current owner on record

Beta coefficient

2.0

Current estimate

Expected market return

12.0%

Historical arithmetic average (annual) return on the S&P 500 Index

RFR

5.0%

10-year Treasury bond yield

4.(10 pts)Using the table above, what is the maximum that an investor should be willing to pay for the share of common stock today (intrinsic value)?

5.Lewis runs an outdoor adventure company and wants to know what effect a tax change will have on his company's WACC. Currently Lewis has the following financing pattern:

Capital

Weight

Cost

Common stock

35%

14%

Preferred stock

15%

11%

Debt

50%

10%

a.)What is the WACC if Lewis' marginal tax rate is 37%?

b.What is the WACC if the marginal tax is 21%?

c.holding all else constant, what is the expected effect on asset prices as the marginal tax rate is reduced from 37% to 21%?

6.Conestego and Fallen, Inc. are two firms that are being considered for a risky two-asset portfolio. Their performances are as described below:

a)What are the expected return and standard deviation of the return of Conestego and Fallen, Inc.?

b)An investor creates a two-asset portfolio consisting of 60% of Conestego and 40% Fallen, Inc. If the correlation coefficient of Conestego and Fallen, Inc's return is 0.33, what is expected to be the expected return and standard deviation of the return of the two-asset portfolio?

Conestego, Inc.

Fallen, Inc

Return

Probability

Return

Probability

4%

.20

-2%

.4

12%

.50

5%

.2

14%

.30

10%

.4

7.The Beta coefficient of Norco, inc. is 2.0. the 20-year Treasury yield is 3.5% and investors currently require 8% to invest in the market as risk premium.

a)(5 pts)What is the required return on Norco, Inc common stock?

b)(5 pts)Norco has a dividend yield of 10%. Use the Dividend Discount Model to estimate the expected growth rate of the dividend.

8.You are considering a project with an initial cash outlay of $70,000 and expected free cash flows of $15,500 at the end of each year for 5 years. The required rate of return for this project is 5.5 percent.

a)(5 pts) What is the payback period of the project?

b)(5 pts)What is the project's NPV?

c)(5 pts)What is the project's IRR?

d)(5 pts)If your firm has a required payback of 5 years and passing the IRR and NPV, would you accept this project? Explain.

Extra credit

9.(10 pts)First-Rate Ballroom,Inc., a national convention planner has 2,500 common shares and 1,000 bonds outstanding.Itssecurities have been performing very well in the marketplace.It enjoys a common stock price of $45 per share,up from $35 a year ago.Its bonds have also performed well, currently priced at $950 per bond, up from $899 a year ago. Itsstock has a beta coefficient of 2.5 and a market risk premium of 8.5%.The yield on 30-year Treasury Bondsis5.5%. First Rate Ballroom's bonds are rather typical for the industry; having 20 years to maturity, a5%coupon rate, and a $1000 face value.What is the WACC of First-RateBallroom? First Rate is in the 21% marginal tax rate?