# Finance questions: calculate required rate of return, yield to maturity, yield to call, monthly payment schedules and more...

1. You are considering an investment in the bonds of a company. The bonds which pay interest semiannunally, will mature in 8 8years and have coupon rates of 9.5%. Currently the bonds are selling for $872.

a) If your require rate of return is 11% for bond in the risk class, what is the highest price you would be willing to pay for these bonds usin the PV function?

b) What is the yield to maturity of these bonds if you purchase them at the current price?

c) If the bonds can be called in three years with a call premium of 4% fo the face value, what is the yield to call on these bonds?

d) Assuming that settlement date for your purchase is the day you are solving this problem, the maturity date is 11/15/2013 and the fist call date is 11/15/2008, recalculate your answers to part a), b), and c) above using price and yield functions.

e) If the market rates increase substantially, do you think it is likely that the bond will be called in 3 years? why or why not?

f) Create a chart that shows the relationship bw the bonds price and your required returns.

QUESTION 2

Competition in the motor industry has never been better for consumers. Ford Motor Company has just started a WILMA 2005 Special discounts for victims of Hurricane Wilma. To qualify, you must have proof of residence in South Florida- from Monroe County in the south to Orange County in the north. Buyers must choose one of two available options on any of Ford's 2005 and 2006 models:

a) 2.9% financing for 60 months with or without down payment.

b) $5,000 cash back from Ford on the original value.

Suzie Goodtaste has only a couple of scratches on her 98 Nissan Maxima but decides to take advantage of the offer; who cares, she has proofs of residence in Pompano Beach. After consultations with her new, flamboyant boyfriend she gets some strong verbal support. They settle on the Premium Mustang Convertible, which cost $27,000. The good news is she can scrap the damaged Maxima "AS IS" for $2,000 and use the proceeds as down payment for the new car; the bad new, she has no good credit. If she chooses the cash back option (option b), she will have to borrow the remaining amount from Atlantic Credit Union at 7.9% APR for 60 months. What will Suzie's monthly payment schedule look like under each option? What advise would you give Suzie if her opportunity cost is 7.9%?

Please help as much as possible with explaing and showing me the steps to these two problems.

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Financial questions relating to Business Organization, Shareholders' wealth, Cash flow statement, financial ratios, time value of money, CAPM, Bonds, payback, NPV, IRR, IOS and MCC schedule, WACC, Leverage, EBIT-EPS approach, Cash Conversion cycle.

1) Explain the three principal forms of business organization. Outline their respective advantages and disadvantages. How do taxes, risk, scale, and ownership liquidity affect the selection of one of these three methods?

2) Compare the shareholder-wealth-maximization model with the corporate-wealth- maximization model. What is the proxy for shareholder wealth? How does the role of the shareholder conflict with that of other stakeholder? Who are some of the stakeholder and give examples of potential conflicts. Additionally, what is meant by the agency problem, why does it arise, and what may be done to address it?

3) Discuss the three components of a cash flow statement. What is another name for the statement of cash flows and why is the cash flow statement important? How is the statement of cash flows similar or different from a cash budget?

4) Outline the five classes of financial ratios (you do not need to give the formulas). What are the advantages and disadvantage to using ratio analysis? What do you need to be mindful of when doing ratio analysis? What is the DuPont ratio, what are its components, and why is it important?

5) Time value of money

a) What is the difference between compounding and discounting?

b) What are the five variables in a time value calculation?

c) What is the difference between an annuity and a mixed cash flow?

d) What is the difference between an ordinary annuity and an annuity due? Which has a greater future value and why?

e) Give examples where you may use time value in your own life.

6) How do you measure the return and total risk for a single asset? What is the difference between portfolio risk and stand alone risk? What is the difference between systematic risk and unique risk? What is the tradeoff between risk and return? How does risk change (absolutely and incrementally) as you randomly add assets to a portfolio? What effect does

the risk of a single asset and the correlation between assets in a portfolio have on portfolio risk?

7) What is the capital asset pricing model (CAPM); what does it show; why is it important: and how do you use it? What are some of the practical and theoretical limitations of the CAPM?

8) Describe and compare the zero-growth, constant-growth, and multi-stage dividend growth models for equity valuation. What assumptions must you make? How do changes in the growth rate and the cost of capital affect valuation?

11) Bonds

a) Using a bond price yield curve, discuss in detail the relationship between bond prices and the yield to maturity.

b) How do maturity and the size of the coupon affect the shape of the bond price yield curve? Explain. What does the shape of the bond price yield curve mean for interest rate risk?

c) Assuming no change in interest rates, what happens to the price of a bond as it approaches maturity? Show this graphically for a par, premium, and discount bond.

d) If you expect interest rates to rise (decline), what kind of bond should you buy? Why?

12) Compare and contrast the payback, NPV and IRR techniques for capital budgeting. What are their respective advantages and disadvantages of each? Will they ever give you different recommendations? If so, which would you prefer and why?

13) Draw and label an NPV profile? What does the profile show? How can you use it to assess an individual project or multiple projects? What factor(s) explains the shape of the NPV profile? What other curve does it resemble?

14) Explain the IOS and MCC schedules. What are they; how are they computed; and how can you use them? What is a break point? Use a graph to illustrate your work. Carefully label this graph.

15) Describe and discuss the following terms. Be sure to include where/why they are important and/or how you can use them.

a) Risk adjusted return

b) Annualized net present value

c) Scenario analysis

d) Sensitivity analysis

e) Capital rationing

16) Discuss the weighted average cost of capital: what is it, how do you compute it, why it is important, and what it does it mean for new projects. Is the weighted average cost of capital constant over time? Why or why not?

What are the different ways to determine the weights? Why do some firms use a hurdle rate that is higher than the WACC? What are the implications of using a higher hurdle rate to shareholder wealth maximization?

17) Define operating, financial and total leverage as well as the degree of operating, financial, and total leverage. How do you use them and why are they important? Is the degree of operating, financial, and total leverage constant? Explain why or why not. How do operating and financial leverage affect a company's target capital structure and earnings per share? How and why do businesses adjust for the tradeoff between financial and operating

leverage?

18) Conceptually and graphically discuss how you would determine the optimal capital structure for a specific firm. Include a discussion of the EBIT-EPS approach.

19) Describe the cash conversion cycle, its funding requirements, and the strategies for managing it.

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