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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 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.

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%.


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