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    11 finance problems: yield to maturity, price of stock, ROR, Beta, price of bond

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    I have attached some sample problems for a test review. I would like to know the answer and how to work these problems. These questions are from a managerial finance class.

    Finance Problems:

    1. Bond's par value- $1,000 pays coupons Semi-annually and matures in 16 years. Coupon Rate is 8% Coupons are paid semi annually. Price of Bond= $666.65. What is yield to maturity of bonds?

    A. 6.5%
    B. 14.5%
    C. 13%
    D. 8%

    2. Common stock pays dividends at the end of 5 years of $4.10 expected to grow at rate of 2.8% forever. Required rate of return is 15.7%. At what price can stock be sold immediately after receiving the dividend?

    A. $32.67
    B. 37.51
    C. 29.39
    D. 26.11

    3. Standard deviation of probability distribution?

    Return -17% 19% 25%
    Probability .35 0.5 0.15

    a. 16.07%
    b. 17.95%
    c. 17.05%
    d. 18.04%

    4. Required rate of return for a common stock using capital asset pricing is 17.8%, risk free rate of 7.12, rate of return 12.5%. What is beta?

    a. 1.49
    b. 1.42
    c. 1.00
    d. 1.99

    5. Investment bought for $1,000 and sold year later for $1150 after receiving dividends of $120 at end of year. What is the rate of return earned?

    a. 11.00%
    b. 15.00%
    c. 3.00%
    d. 27.00%

    6. Common stock to pay dividends of $3.20, $5.30, $4.00, $4.10 at end of next four years respectively. Dividends grow at rate of 3.5% forever. Required rate of return is 14.2%. What is the price of stock?

    a. $39.66
    b. 35.28
    c. 38.99
    d. 43.90

    7. Bonds Par Value of $3000 matures in 12 years. Coupon rate is 11%. Required rate of return is 9.83%. What is the price of Bond?

    a. $3,326.54
    b. $3,251.54
    c. $2,772.12
    d. $3,241.17

    8. Firm to purchase free cash flows at $3.20, $5.30 and $4.10 million at end of next 3 years. Grow 2.4% cash flow forever. Weighted average cost of capital is 16.2% value.

    a. 0.07
    b. 28.68
    c. 30.42
    d. 34.62

    9. Firm purchased an asset two years ago for $118,000 and spent another $34,000 installation expenses. Asset falls within the five year macrs class for depreciation purposes. Tax rate 40%. What is the amount of taxes paid if asset is sold for $63,000?

    10. Firm estimating terminal cash flows for project involving acquisition of machine. Machine sold $31,000 at end of life 3 years from today. Additional working capital of $24,000 required. Machine purchased $158,000 and $18,000 install expense. What is terminal cash inflow for project if tax rate is 40% and machine in 5 year macrs?

    11. Beta can be negative
    True or False?

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    Solution Preview

    The solutions are as follows:

    1. The formula for calculating Present Value (PV) of a bond is:
    PV = C/YTM[1 - 1/(1+YTM/2)^2n] + F/(1+YTM/2)^2n

    where, C=Coupon=$80, n=number of years to maturity and F=face value=$1000.

    Now it's very difficult to calculate the YTM without using a spreadsheet. Another method is, since we have the alternatives we will do reverse engineering.

    Keep one important thing in mind, when the bond is selling below par it means YTM>C therefore, our answer can be only 13% or 14.5%.

    Let's put 13% as YTM in the above equation, we get:
    PV = 80/0.13[1 - 1/(1.065)^32] + 1000/(1.065)^32 = $666.65, hence the answer is 13%.


    Solution Summary

    The solution calculates each problem showing all the formulas including discussion about the problems. The answers are given. No Excel formatted in this problem.