A-3 (Coverage ratio) The firm in the two preceding problems also had $6 million of principal repayments during the latest 12 months. Its marginal tax rate is 40%. Calculate the debt service coverage ratio.

A-4 (WACC with rebalancing) Nathan’s Catering is a gourmet catering service located in Southampton, New York. It has an unleveraged required return of r = 43%. Nathan’s rebalances its capital structure each year to a target of L = 0.52. T* = 0.20. Nathan’s can borrow currently at a rate of r of r = 43%. Nathan’s rebalances its capital structure each year to a target of L = 0.52. T* = 0.20. Nathan’s can borrow currently at a rate of rd = 26%. What is Nathan’s WACC?

WACC = r - T* L rd [(1 + r) / (1 + rd)]
WACC = 0.43 - 0.20 x 0.52 x 0.26 [(1 + 0.43) / (1 + 0.26)] = 0.3993 = 39.93%

A-10 (Dividend adjustment model) Regional Software has made a bundle selling spreadsheet software and has begun paying cash dividends. The firm’s chief financial officer would like the firm to distribute 25% of its annual earnings (POR = 0.25) and adjust the dividend rate to changes in earnings per share at the rate ADJ = 0.75. Regional paid $1.00 per share in dividends last year. It will earn at least $8.00 per share this year and each year in the foreseeable future. Use the dividend adjustment model, Equation (18.1), to calculate projected dividends per share for this year and the next four.

...FIN/571: Corporate Finance
TextProblemSets - Week Two
Chapter Five
Question # 4
Define the following terms: bond indenture, par value, principal, maturity, call provision, and sinking fund.
Bond indenture. Bond indenture is a legal contract for a publicly traded bond. The structure of this contract outline incentives explicitly by detailing responsibilities, constraints, penalties, and oversight required. For example, contracts may specify interest and principal payment timing and amounts.
Par value. Par value denotes face value or designated value of a bond or stock. Par value of a bond is typically $1,000 and the sum investors pay upon issue. It is also the sum received when they redeem the bond matures. Conversely, stock par value is frequently set at $1. In this case, par value is an accounting tool that shows no connection to the stocks’ market value.
Principal. The term “principal” refers to a sum of money one borrows or invests. The face amount of a bond - the value printed on a stock or bond, or a debt balance. Principal does not encompass finance charges. Principal also describes an investor represented by a broker who executes trades on that investor’s behalf or an investor who trades for his or her own benefit. Principal also refers to a party affected by an agent’s decisions in a principal-agent relationship.
Maturity. Maturity is the end of a bond’s life. In finance, maturity (or maturity date)...

...TextProblemSets
A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a
required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?
Number of years (N) = 10, future value (FV) = 1000, interest rate (I/YR) = 9
0.074 * 1000 = 74 = PMT or annual payment, I then pressed CPT on my financial calculator to compute the price of the bond and then pressed PV or present value.
The fair value of the bond is $897.32.
Using Cash Flow of $1000 to calculate present value,
Cash flow= $1000
PV factor = 1/(1+i)^n = 0.42241
PV = $1000*0.42241= 422.41
Using coupon rate to calculate present value of annuity
Cash flow= $1000 * 7.4/100 = $74
PV factor = (1/i)*(1- 1/(1+i)^n) = 6.4176
So, PV = $74*6.4176 = 474.90|
So the fair value of bond = 474.90+422.41 = $897.31
A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60
next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming
annual dividend payments, what is the current market value of a share of RHM stock if the
required return on RHM common stock is 10%?
Current market value = D1/(Required return – growth rate) = 5.60/(10%-6%) = $140
A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The preferred dividends is now growing. What is the required return on James River preferred stock?
Required...

...Bonds-1. Interest on a certain issue of bonds is paid annually with a coupon rate of 8%. The bonds have a par value of $1,000. The yield to maturity is 9%. What is the current market piece of these bonds? The bonds will mature in 5 years.
P= CPN x (1/y) {1-[1/(1+y)^n] + [FV/ (1+y)^n]
CPN= 1000 x .08= 80
P= 80 (1/.09) {1- [1/(1.09)^5]} + [1000/(1.09)^5]
= 73.39 (.351) + 649.35
= $675.11
Bonds-2. A certain bond has 12 years left to maturity. Interest is paid annually at a coupon rate of 10%. The bonds are currently selling for $850. What is their YTM?
850= 1000/ (1+y)^12
850 * (1+y)^12= 1000
(1+y) ^12= 1.18
1+y= (1.18)^(1/12)
Y= 1.014-1
Y= .014 or 1.4%
Bonds-3. A certain bond pays a semiannual coupon rate at a 10% annual rate. The bond has a par value of $1,000. There are eight years to maturity. The yield to maturity is 9%. What is the current price of the bond?
$1000 * 10%/2= 50
P= 50 * (1/.09) {1-[1/(1.09)^8} + [1000/(1.09)^8]80.29
= 555.56 (.50) + 502.51
= 277.78+ 502.51
= $780.29
Bonds-4. A particular corporate bond has a par value of $1,000. Coupon payments are $40 and are paid twice a year. Seven years are left on the life of the bond.The YTM is 9%. What is the price of the bond?
P= 80 * (1/.09) {1-{1/(1.09)^7} + [1000/(1.09)^7]
= 888.89 (.45) + 546.45
P= $946.45
Bond-5. A given bond has 5 years to maturity. It has a face value of $1,000. It has a YTM of 5% and the coupons are paid semiannually at a 10% annual rate. What does the bond currently sell for?
P= 50 *...

...ProblemSets
Chapter 5
A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?
Calculating PV factor:
i= required return = 9% = 0.09
n= 10 years
Using Cash Flow of $1000 to calculate present value,
Cash flow= $1000
PV factor = 1/(1+i)^n = 0.42241
PV = $1000*0.42241= 422.41
Using Coupon Rate to calculate present value of Annuity
Cash flow= $1000 * 7.4/100 = $74
PV factor = (1/i)*(1- 1/(1+i)^n) = 6.4176
So, PV = $74*6.4176 = 474.90|
So the fair value of bond = 474.90+422.41 = $897.31
A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%?
Current market value = D1/(Required return – growth rate)
= 5.60/(10%-6%) = $140
A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The preferred dividends is now growing. What is the required return on James River preferred stock?
Required Return = Dividend/Market Price
Dividend = $3.38
Market Price = $45.25
Required Return = $3.38 / $45.25
Required Return = 7.47%
A14.(Stock Valuation) Suppose Toyota has nonmaturing...

...The following formula calculates the present values: PV = FV/ (1+r) ^t, where
FV is the cash flow, discount rate r = 11%, t = year.
From there: 1st year = $2.00 x 0.901= PV= $1.80
2nd year = $2.20 x 0.802 = PV= $1.79
3rd year = $35.40 x 0.731 = PV=$25.88
Total PV= $29.47
Thus, the PV of total benefit is $29.47
Chapter 9 # 22: Alternative present values
Your rich godfather has offered you a choice of one of the three following alternatives: $10,000 now; $2,000 a year for eight years; or $24,000 at the end of eight years. Assuming you could earn 11 percent annually, which alternative should you choose? If you could earn 12 percent annually, would you still choose the same alternative?
Answer: I found two answers for the same problems. One is bringing the present value to the future and the other is bringing the future value to the present. In each one of them, different solutions were proposed.
A. Present Value to the future
Option 1: $10,000 now with 11% interest.
$10,000 x 11% = $11,100(10,000 + 1,100)
1,100 x 8 yrs = $8,800 + $10,000 = $18,800
$10,000 now with 12% interest.
$10,000 x 12% = $11,200 (10,000 + 1,200)
1,200 x 8 yrs = $ 9,600 + 10,000 = $19,600
Option 2: $2,000 a year for eight years.
$2,000 x 11% = $2,220
$2,220 x 8 Years = $17,760
$2,000 x 12% = $2,240
$2,240 x 8 Years = $17,920
Option 3
$24,000 at the end of eight years.
Choice: Option 3. The rate of return in Options 1 and 2 is less than what is...

...PROBLEMSET # 1
Instructions:
1) Open book, open notes limited to only class materials.
2) Unlimited time.
3) This must be reflective of your individual effort. GMU Honor Code applies.
4) The ProblemSet #1 (only the question solutions portion) is due at the end of the day on September 24th.
5) Show all work, as partial credit will be given for each question’s answer. Organize your work so it is easy to follow. You can use word, power point, excel or combinations of the above.
6) Return the Solutions pages to be graded. Put a copy in the course folder and send me an electronic copy that I will grade and return to you along with the approved solution.
7) The exercise is worth 100 points.
8) GOOD LUCK
Name: ________________________________
1) You are savings for the college education of your two children. They are two years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate your children’s college expenses to be $21,000 per year per child, payable at the end of each school year. The annual interest rate is 15%. Your deposits begin one year from today. You will make your last deposit when your oldest child enters college. (15 points)
How much money must you deposit in an account to fund your children’s education?
2) My spouse and I are each 62 and hope to...

...Week 2 TextProblemSet
Candy Wungnema
FIN/571
February 5, 2013
Kathleen O’Keefe
Week 2 TextProblemSet
Chapter 5
4. Define the following terms: bond indenture, par value, principal, maturity, call provision, and
sinking fund.
• Bond indenture: A contract for a bond defining specified terms for interest and borrowed capital to be repaid to the lender.
• Par value: “Specifies the amount of money that must be repaid at the end of the bond’s life, which is also called face value or maturity value” (Emery, Finnerty, & Stowe, 2007, p. 112).
• Principal: The original amount of debt or balance borrowed, which does not include interest.
• Maturity: The life end of a contractual obligation.
• Call provision: The right for the issuer to payoff bonds prior to the maturity date (Emery, Finnerty, & Stowe, 2007).
• Sinking funds: Bon repayment in multiple installments (Emery, Finnerty, & Stowe, 2007).
11. What is interest-rate risk? How is interest-rate risk related to the maturity of a bond and to
the coupon rate for a bond?
“Interest-rate risk is the sensitivity of a bond’s value to interest-rate change as it depends primarily on the bond’s remaining maturity” (Emery, Finnerty, & Stowe, 2007, p. 132). An issued bond pays a fixed rate of interest called a coupon rate until it matures. The current prevailing interest rates and the...

...PROBLEMSET 5:
INTEREST RATES, AMORTIZING LOANS, BOND VALUATION, STOCK VALUATION
1. A typical credit card agreement quotes an interest rate of 18 percent APR. Monthly payments are required. What is the actual interest rate you pay on such a credit card? 2. After carefully going over your budget, you have determined you can afford to pay €632 per month toward a new sports car. You call up your local bank and find out that the going rate is 1 percent per month for 48 months. How much you can borrow? 3. You ran a little short on your spring break vacation, so you put €1,000 on your credit card. You can only afford to make the minimum payment of €20 per month. The interest rate on the credit card is 1.5 percent per month. How long will you need to pay off the €1,000? 4. Suppose you borrow €10,000. You are going to repay the loan by making equal annual payments for five years. The interest rate on the loan is 14 percent per year. Prepare an amortization schedule for the loan. How much interest will you pay over the life of the loan? 5. You have recently finished your Master degree and you want to purchase a new BMW immediately. The car costs about €21,000. The bank quotes an interest rate of 15 percent APR for a 72-month loan with a 10 percent down payment. What will your monthly payment be? What is the effective interest rate on the loan? 6. A bond has a 10 percent coupon rate and a €1,000 face value. Interest is paid semiannually, and the bond...