Week 2 Fin571 Problem Sets

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Chapter 5 Question 6
What is the basic approach that is used to value any asset, including bonds and common stocks? There are 3 main approaches to valuing assets: book or cost as assets are recorded at actual acquisition cost on the books; the market approach which looks at what the shareholders equity or stock is really worth; and income approach which indicates how much money a business might generate in the future. Not quite precise enough. The method for valuing any asset is to calculate the present value of its expected future cash flows. Chapter 5 Problem 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? $897.32 Correct

Chapter 5 Problem A16
(Growth rate) Suppose Toshiba has a payout ratio of 55% and an expected return on its future investments of 15%. What is Toshiba’s expected growth rate? .55-.15=.40x100=40 Incorrect
A company’s payout ratio (POR) is the proportion of earnings it pays out in dividends. • Therefore, (1 − POR) is the amount the company retains and reinvests. • i represents the expected return on the money retained. • Growth is the product of the two: g = (1 − POR)i

g = (1 - POR)i = (1 - 0.55) x 0.15 = 6.75%

Chapter 6 Problem B5 (please see attached excel spreadsheet) (Expected return and risk) General Eclectic Corporation is considering three possible capital investment projects. The projected returns depend on the future state of the economy as given here. a. Calculate each project’s expected return, variance, and standard deviation. Excel Spreadsheet is correct b. Rank the projects on the basis of (1) expected return and (2) risk. Which project would you choose? Not ranked Expected Return Rank (Best to Worst): Project 1, Project 2, Project 3 Risk Rank (Best to Worst): Project 3, Project 1, Project 2

Investment 1 has weighted average return based...
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