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Finance questions

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Exercises:

1) For 2006, Treasury bonds with 5-year maturities offered a return about 8.65%; face value of $1,200; and 7.25% coupon rate. What would be the present value of this bond?

2) Mrs. Smith has 20 common stocks from A&T Global Enterprises. If the A&T Global Enterprises' board directors believe that the price at the end of the year, these common stocks will rise to $57.80 per common stock and the estimate dividend paid would be $2.15 per common stock, what would be the actual price for each common stock if the expected rate of return is 10.75%?

3) Simon bought a common stock from Monona Air Cleaners Inc. at $35 per share for January 5, 2006 and he expected that the price per share increase by $8 for December 31, 2006. If Monona Air Cleaners will pay $1.75 for dividend per share, what would be the expected rate of return of Simon's shares?

4) Four Possible Outcomes for Portfolio Return
Outcome Possible Return Probability
Expansion 60% 0.1
Normal 25% 0.5
Recession 5% 0.3
Other -15% 0.1

A) Calculate the following: 1) The Expected Portfolio Return; 2) Variability of Expected Return.

5) Consider the following two-assets:

Expected return Expected risk (σ)
Company X - Japan 10% 12%
Company X - Spain 20% 25%
Correlation coefficient (ρJ-S) 0.45

A) Calculate the portfolio risk (expected return and variability) if you decide invest 35% of your profit in Spain and the other in Japan.
6) By 2005 the rate of return of Treasury bill was 5.25% and market rate of return was 9.75%, with .85 of beta for J&M Warehouse's common stock. What is the expected rate of return of its common stocks?.
7) Consider the previous exercise and calculate beta if the market rate of return
is 12.25%.

Solution Preview

1) For 2006, Treasury bonds with 5-year maturities offered a return about 8.65%; face value of $1,200; and 7.25% coupon rate. What would be the present value of this bond?.

The present value of the bond is the present value of the interest and the principal discounted at the offered return of 8.65%.
The annual interest is 1,200 X 7.25% = $87. Interest is an annuity and so the present value would be calculated using the PVIFA table
PV of interest is 87 X PVIFA (5,8.65%) = 87 X 3.9252 = 341.50
The principal amount is $1,200 and is a lump sum. We use the PVIF table to get the PV factor
PV of principal is 1,200 X PVIF (5,8.65%) = 1,200 X 0.6605 = 792.56
The PV of the bond = 341.50 + 792.56 = $1,134.06

2) Mrs. Smith has 20 common stocks from A&T Global Enterprises. If the A&T Global Enterprises' board directors believe that the price at the end of the year, these common stocks will rise to $57.80 per common stock and the estimate dividend paid would be $2.15 per common stock, what would be the actual price for each common stock if ...

Solution Summary

The solution explains some finance questions relating to present value, common stock price, expected rate of return, and more

$2.19