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.
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?
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?
3. Standard deviation of probability distribution?
Return -17% 19% 25%
Probability .35 0.5 0.15
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?
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?
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?
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?
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.
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?
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%.
The solution calculates each problem showing all the formulas including discussion about the problems. The answers are given. No Excel formatted in this problem.