# Full-Time MBA student

Chap 6

11.a.With a par value of $1,000 and a coupon rate of 8%, the bondholder receives $80 per year.

b.

c.If the yield to maturity is 6%, the bond will sell for:

18.a.The coupon rate must be 7% because the bonds were issued at face value with a yield to maturity of 7%. Now, the price is:

b.The investors pay $641.01 for the bond. They expect to receive the promised coupons plus $800 at maturity. We calculate the yield to maturity based on these expectations by solving the following equation for r: r = 12.87%

Using a financial calculator, enter: n = 8; PV = ()641.01; FV = 800; PMT = 70, and then compute i = 12.87%

Chap 7

41.DIV1 = $1

DIV2 = $2

DIV3 = $3

g = 0.06 P3 = ($3 1.06)/(0.14 – 0.06) = $39.75

Chap 8

19.a.NPV for each of the two projects, at various discount rates, is tabulated below.

NPVA = –$20,000 + [$8,000 annuity factor(r%, 3 years)]

= –$20,000 +

NPVB =

Discount Rate

NPVA

NPVB

0%

$4,000

$5,000

2%

3,071

3,558

4%

2,201

2,225

6%

1,384

990

8%

617

-154

10%

-105

-1,217

12%

-785

-2,205

14%

-1,427

-3,126

16%

-2,033

-3,984

18%

-2,606

-4,784

20%

-3,148

-5,532

From the NPV profile, it can be seen that Project A is preferred over Project B if the discount rate is above 4%. At 4% and below, Project B has the higher NPV.

b.IRRA = Discount rate (r) which is the solution to the following equation: r = IRRA = 9.70%

IRRB = Discount rate (r) which is the solution to the following equation:

= 0 IRRB = 7.72%

Using a financial calculator, find IRRA = 9.70% as follows: enter PV = (–)20; PMT = 8; FV = 0; n = 3; compute i

Find IRRB = 7.72% as follows: enter PV = (–)20; PMT = 0; FV = 25; n = 3; compute i

34.a.Present Value =

NPV = –$80,000 + $100,000 = $20,000

b.Recall that the IRR is the discount rate that makes NPV equal to zero:

(– Investment) + (PV of cash flows discounted at IRR) = 0

Solving, we find that:

IRR = ($5,000/$80,000) + 0.05 = 0.1125 = 11.25%

Chap 11

9. a.

Year

Stock market return

T-bill return

Risk premium

Deviation from mean

Squared deviation

2003

31.64

1.02

30.62

19.146

366.57

2004

12.62

1.2

11.42

-0.054

0.00

2005

6.38

2.98

3.4

-8.074

65.19

2006

15.77

4.8

10.97

-0.504

0.25

2007

5.62

4.66

0.96

-10.514

110.54

Average

11.474

542.56

b.The average risk premium was: 11.474%

c. The variance (the average squared deviation from the mean) was 409.2538 (without correcting for the lost degree of freedom). Therefore: standard deviation =

16.Boom:

Normal:

Recession:

Variance =

Standard deviation = = 31.04%

Portfolio Rate of Return

Boom: (28 + 150)/2 = 61.00%

Normal: (8 + 27.5)/2 = 17.75%

Recession: (48 –100)/2 = –26.0%

Expected return = 17.58%

Standard deviation = 35.52%

Chap 12

6.a.The expected cash flows from the firm are in the form of a perpetuity. The discount rate is:

rf + (rm – rf ) = 4% + 0.4 (11% – 4%) = 6.8%

Therefore, the value of the firm would be:

b.If the true beta is actually 0.6, the discount rate should be:

rf + (rm – rf ) = 4% + [0.6 (11% – 4%)] = 8.2%

Therefore, the value of the firm is:

By underestimating beta, you would overvalue the firm by:

$147,058.82 – $121,951.22 = $25,107.60

7.Required return = rf + (rm – rf ) = 6% + [1.25 (13% – 6%)] = 14.75%

Expected return = 16%

The security is underpriced. Its expected return is greater than the required return given its risk.

12.Figure shown below.

BetaCost of capital (from CAPM)

0.754% + (0.75 7%) = 9.25%

1.754% + (1.75 7%) = 16.25%

Beta

Cost of capital

IRR

NPV

1.0

11.0%

14%

+

0.0

4.0%

6%

+

2.0

18.0%

18%

0

0.4

6.8%

7%

+

1.6

15.2%

20%

+

13. The appropriate discount rate for the project is:

r = rf + (rm – rf ) = 4% + 1.4 (12% – 4%)...

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