TIME VALUE OF MONEY
1. You invested $1,000 at 4% compounded annually. How much interest was earned in year 5?

2. Gianni invested $10,000 at a rate of 6% compounded annually. How long will it take for the investment to grow to $40,000 3. What is the present value of an income stream which has a negative flow of $100 per year for each of the next 3 years, and a positive flow of $300 per year in years 4 through 7, if the appropriate discount rate is 10%?

BONDS

1. The current market price of McGill Corporation's 10 percent, 10 year bonds is $1,297.58. A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000. What is the YTM (stated on a nominal, or annual, basis) if the bonds mature 10 years from today?

2. A 6-year bond that pays 8 percent interest semiannually sells at par. Another 6-year bond of equal risk pays 8 percent interest annually. Both bonds are not callable. What is the price of the bond that play annual interest?

STOCKS

1. A company has just paid a dividend of $1.40 per share. Dividends are expected to grow at a rate of 5% per year for the foreseeable future. If the required return is 10%, what is the value of one share of the company’s stock.

2. Superior Enterprises has just paid a dividend of $1.05 and will pay $1.10 next year. Dividends are expected to grow at a constant rate indefinitely. What is the required rate of return if the stock is selling for $30 today?

3. Junkies Corporation has just paid a dividend of $0.90. Dividends are expected to grow at 20% for years one and two, 15% for years three and four, 10% for years five and six, and 5% thereafter. What is the expected dividend for year 10 if the required return is 18 percent?

4. The stock of SuperGrowth, Inc. just paid a dividend of $0.78. What is the expected capital gains yield if the stock is selling for $28.25 today and the required rate of return is 15 percent?

...SCHOOL OF BANKING AND FINANCE
QUESTIONS The Valuation of a Firm’s Securities Please note that some answers are exact when rounded to 2 or 3 decimal places because of the use of PV tables rather than calculators. Multiple-choice Questions Bond Valuation 1. One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the __________ the time to maturity, the __________ the change in price. a. longer; smaller b. shorter; larger c. longer; greater d. shorter; smaller e. Statements c and d are correct 2. You are considering investing in three different bonds. Each bond matures in 10 years and has a face value of $1,000. The bonds have the same level of risk, so the yield to maturity is the same for each. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming that interest rates are expected to remain at their current level for the next 10 years, which of the following statements is most correct? a. Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year. b. Bond A's price is expected to decrease over the next year, Bond B's price is expected to stay the same, and Bond C's price is expected to increase over the next year. c. Since the bonds have the same yields to maturity, they should all have the same price, and since interest rates are not expected...

...Company Background:
Starting Right Company
* Inspired by a movie, Julia Day decided to build a baby food company named as Starting Right Company, which targets the upper class market.
* To differentiate the product from its competitors, the company offers frozen baby foods with no preservatives while ensuring great taste.
* Julia Day hired people with experience in finance, marketing and production. The group started to develop product samples of the new frozen baby food.
* Julia decided that each investment should be in blocks of $30,000. In addition, to become an eligible investor, one should have an annual income of at least $40,000 and net worth of $100,000.
Definition of the Problem:
The case presents six (6) independent questions requiring investment-related recommendations based on specific situations presented.
Case Facts and Information:
To help raise funds for the company, Starting Right Corp. is offering three (3) investment options, the specifics of which are stated below:
* Corporate bonds with a return of 13% per year for the next five (5) years and a further guarantee of at least $ 20,000.00 back at the end of the five (5) years.
*The computation of the returns for corporate bonds is assumed to be for simple interest since it is not stated to be compounded annually.
* Preferred stock – Initial investment increases by a factor of four (4) in a good market and only half of it in an...

...Please help with the assignment below.
Finance 100 Week 6 Homework 1 Chapter 10
P2
2. Judy Johnson is choosing between investing in two Treasury securities that mature in five years and have par values of $1,000. One is a Treasury note paying an annual coupon of 5.06 percent. The other is a TIPS which pays 3 percent interest annually.
a. If inflation remains constant at 2 percent annually over the next five years, what will be Judy's annual interest income from the TIPS bond? From the Treasury note?
b. How much interest will Judy receive over the five years from the Treasury note? From the TIPS?
c. When each bond matures, what par value will Judy receive from the Treasury note? The TIPS?
d. After five years, what is Judy's total income (interest + par) from each bond? Should she use this total as a way of deciding which bond to purchase?
P4
4. Assume a $1,000 face value bond has a coupon rate of 8.5 percent, pays interest semi-annually, and has an eight-year life. If investors are willing to accept a 10.25 percent rate of return on bonds of similar quality, what is the present value or worth of this bond?
P6
6. The Garcia Company's bonds have a face value of $1,000, will mature in ten years, and carry a coupon rate of 16 percent. Assume interest payments are made semi-annually.
a. Determine the present value of the bond's cash flows if the required rate of return is 16.64 percent.
b. How would your answer change if the...

...1. Stiles Corporation issues a new series of bonds on January 1, 1982. The bonds were sold at part ($1000), had a 12% coupon, and matured in 30 years, on December 31, 2011. Coupon payments are made semiannually (on June 30 and December 31).
a) What was the YTM on January 1, 1982? - Explain
b) What was the price of the bonds on January 1, 1987, 5 years later, assuming that interest rates had fallen to 10%? (Show in equation form, plug all the relevant numbers and without calculation, say whether the price would be above or below the par value)
c) Assume price you calculated is $1150. Find the current yield, capital gains yield, and total return on January 1, 1987. Explain what each of the calculated terms indicate.
d) On July 1, 2005, 6.5 years before maturity, Pennington’s bonds sold for &916.42. What was the YTM, the current yield, capital gains yield, and total return at that time? (No need to calculate them, but show in equation form, and conclude whether they increased, decreased or stayed the same and why)
e) Now assume that you plan to purchase an outstanding Pennington bond on March 1, 2005, when the going rate of interest given its risk was 15.5%. How large a check must you write to complete the transaction?
2. A bond’s expected return is sometimes estimated by its YTM and sometimes by its YTC. Under what conditions would the YTM provide a better estimate and when would the YTC be better? EXPLAIN
3. An investor has two bonds in his portfolio that both have...

...1. Refer to the following information:
Stock | E(r) | | Correlation Coefficients |
1 | 0.06 | 0.20 | 1 with 2: -0.10 |
2 | 0.08 | 0.10 | 1 with 3: +0.60 |
3 | 0.15 | 0.15 | 2 with 3: +0.05 |
A portfolio is formed as follows: sell short $1,000 of Stock 1; buy $1,500 of Stock 2; buy $1,500 of Stock 3. The investor uses $1,000 of his own equity, with the remaining amount borrowed at a risk-free interest rate of 4% (with continuous compounding).
(a) Assuming that there are no restrictions on the use of short-sale proceeds, what is this investors expected rate of return?
(b) What are some of the issues associated with short-selling, and what impact could these issues have on the expected return calculated in part (a).
ANSWER
(a) w1 = -1; w2 = 1.5; w3 = 1.5; wr = -1
E(r) = -1*0.06 + 1.5*0.08 + 1.5*0.15 + (-1)*0.04 = 24.5%
(b) short selling is restricted; unable to use proceeds from the short sale; fee for short selling reduces return. All of these restrictions could fundamentally change the return to the portfolio.
2. Consider a European call option on a stock. The stock price is $70, the time to maturity is 12 months, the risk free rate of interest is 10% per annum (with continuous compounding), the exercise price is $65, and the volatility is 32%. A dividend of $1 is expected in six months time. Determine the price of the option using the binomial method with 6-month steps.
ANSWER
3. The current price of silver is $9 per...

...LONG TERM SOURCES OF FINANCE WITH REFERENCE TO INDIA
Long term sources of finance are the institutions or agencies or institutions from which finance/ funds can be raised for a long period of time. In case of sole-proprietary concerns and partnership firms long term funds are generally provided by the owners themselves or by their retained profits. But in case of Companies whose financial requirements are rather large, the following are the sources from which funds are raised:
(1.) Capital Market
(2.) Special Financial Institutions
(3.) Mutual Funds
(4.) Leasing Companies
(5.) Foreign Sources
(6.) Retained Earnings
CAPITAL MARKET
Capital markets refer to the organization and the mechanism through which the companies, other institutions and the government raise long-term funds. So it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issuing various securities such as shares, debentures, bonds etc. for trading of securities there are two different segments in capital market. One is primary market and the other is secondary market. The primary market deals with new/ fresh issue of securities and is. Therefore, known as new issue market. the secondary market on the other hand, provides a place for purchase and sale of existing securities and is known as stock market or stock exchange.
Individuals and institutions which...

...preferred stock of Walter Industries Inc. currently sells for $36.09 a share and pays $2.41 in dividends annually. What is the firm’s cost of capital for the preferred stock?
12. The preferred stock of Gator Industries sells for $35.45 and pays $2.79 per year in dividends. What is the cost of preferred stock financing? If Gator were to issue 482,000 more preferred shares just like the ones it currently has outstanding, it could sell them for $35.45 a share but would incur flotation costs of $2.95 per share. What are the flotation costs for issuing the preferred shares and how should this cost be incorporated into the NPV of the project being financed?
13. The Walgreen Corporation is contemplating a new investment that it plans to finance using one-third debt. The firm can sell new $1,000 par value bonds with a 15-year maturity at a price of $951 that carry a coupon interest rate of 13.1%. If the company is in a 34% tax bracket, what is the after-tax cost of capital to Walgreen for the bonds?
14. Your firm is planning to issue preferred stock. The stock is expected to sell for $98.92 a share and will have a $100 par value on which the firm will pay a 13.4% dividend. What is the cost of capital to the firm for the preferred stock?
15. The common stock for Oxford, Inc. is currently selling for $22.94, and the firm paid a dividend last year of $1.75. The dividends and earnings per share are projected to have an annual growth rate of 3.7% into the...

...Therefore is is expected that the bond price will decrease. It should now be worth less than the face value (less than $1000) given the new market yield is higher than the coupon rate.
Question Four
A foreign exchange dealer quotes you the following spot cross rates:
AUD/JPY 82.50-60
AUD/EUR 0.5905-15
a) Explain from the perspective of the dealer what the FX quote indicates.
b) Transpose both the quotations above.
JPY/AUD = 0.01211-12
EUR/AUD = 1.6906-35
c) Assuming an efficient market, calculate the EUR/JPY cross rates.
EUR/JPY 139.48-88
Question Five
An investor has entered into a transaction whereby he paid $0.50 and was granted right to purchase a share for $8.00 in three months time.
a) In finance derivatives terminology, what is the transaction that the investor entered into?
Call option with premium $0.50 and exercise price $8.00.
b) Calculate the break-even share price for this transaction. Does this differ from the share price at which the investor would exercise her right? Explain why/why not.
B/E = $8.50
Exercise = $8.00.
Yes. Exercise as soon as you would get positive amount for doing so. However, need to cover 50c premium before you make a profit.
c) Draw a fully labelled diagram of the pay-off for this transaction....