I would really like to know the solutions to these problems to make sure that I am doing them correctly.
1. You intend to purchase a 20-year, $1,000 face value bond that pays interest of $35
every 6 months. If your nominal annual required rate of return is 9.5 percent with
semiannual compounding, how much should you be willing to pay for this bond?
Bond value: _________
2. ABC Corporation has outstanding bonds with an annual 8.0 percent coupon.
Interest is paid semiannually. The bonds have a par value of $1,000 and a price of
$1,150. The bonds will mature in 15 years. What is the yield to maturity on the
bonds? (8 points)
Yield to maturity: __________
3. The common stock of ABC Corporation is selling for $35. The stock recently paid
dividends of $2.70 per share and has a projected constant growth rate of 5.50%. If
you purchase the stock at the market price, what is your expected rate of return?
Expected rate of return: __________
4. ABC Corporation recently paid a dividend of $2.50 per share, and the company
will experience a non-constant growth of 25% for the next three years and the
constant growth rate of 6% will start at the end of the third year. The company's
beta equal is 1.35, the required rate of return on the market is 10%, and the riskfree
rate is 3.5%. What should be the fair price of the ABC's stock? (8 points)
Stock price: $__________
5. An analyst is interested in using the Black-Scholes model to value call options on
the stock of ABC Inc. The analyst has accumulated the following information:
The price of the stock is $28.
The strike price is $32.
The option matures in 3 months (t = 0.25).
The standard deviation of the stock's returns is 0.40 and the variance is 0.16.
The risk-free rate is 5 percent.
Given this information, calculate the fair value of the call option using the Black-
Scholes model. (10 points)
Call Option Value: $_____________
6. ABC Corporation plans to maintain its debt structure in the future. The firm has
35 percent debt, 10 percent preferred stock, and 55 percent equity in their capital
structure. ABC has outstanding bonds with an annual 9 percent coupon and pays
interest on a semiannual basis. The bonds have a par value of $1,000, market
price of $1,100, and maturing in 20 years. The firm has a preferred stock with a
par value of $30, a dividend rate of 10%, a floatation cost of $1.75, and a market
price of 50. The market price of the company's common stock is $35, common
dividends are $3.50, constant growth is 5.0 percent, and the stock's beta is 1.20.
The risk-free rate is 5.0%, the market returns are 13.0 percent, and the risk
premium is 8.0 percent. What is the company's weighted average cost of capital
if the marginal tax rate is 35 percent? (10 points)
Weighted Average Cost of Capital: _____________
7. ABC Corporation is considering the purchase of a new machine which will reduce
manufacturing costs by $75,000 annually (cash inflows). ABC expects to sell the
machine at the end of its four year operating life for $35,000. ABC's marginal tax
rate is 35%, and it uses a 10 percent cost of capital to evaluate projects of this
nature. If the machine costs $195,000, should the project be accepted? (10 points)
PBP: _________NPV: $_____________ IRR ________ %
8. The project being considered by the firm are mutually exclusive and have the
following projected cash flows: (10 points)
Year Project X Project Y
0 ($350,000) ($350,000)
1 175,000 150,000
2 175,000 0
3 175,000 375,000
Based on the information given, which of the two projects would be preferred,
This solution is comprised of a detailed explanation to answer how much should you be willing to pay for this bond.