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Compare and contrast the yields and maturities

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Part One: Quantitative Exercises

Barbow Enterprises, Inc., is considering an expansion in their operations. One of the first items they want to examine is their cost of capital. According to the accounting department, the following items and their respective costs have been identified:

The cost of Common Equity: 15%
The before tax cost of debt: 12%
No Preferred stock
They have also calculated the marginal tax rate to be 40% and the stock sells at its book value.

Barbow Enterprises Inc.
Balance Sheet

Assets Liabilities and Owners' Equity

Cash $240 Long Term Debt $2,304

Accounts Receivable 480 Equity 3,456
Inventories 720
Net P&E 4,320

Total Assets $5,760 Total Liabilities and owners'
Equity $5,760

Calculate Barbow's after-tax weighted average cost of capital, using the data in the balance sheet above.

Part Two: Final Project 3: Government Securities

In this part of your Final Project, you will research and analyze current information (that is, within the past two months) on government securities.

Step 1: Go to a financial Web site to do your research. The following are three suggested sites, but you may use others. Be sure to cite your sources!

finance.yahoo.com
http://www.google.com/finance
moneycentral.msn.com
Step 2: Research current information (within the last two months) on the yields and maturity for:

U.S. treasuries
Municipal bonds
Corporate bonds
Required:

Discuss what the pure expectations theory would imply about the yield curve.
Compare and contrast the yields and maturities for each of the securities.
Discuss which you would hold and why relative to interest rate risk.

Criteria for above tasks:

1. Correctly calculated Barlow's after-tax weighted average cost of capital.
2. Researched the appropriate Web sites and obtained the necessary information on the securities indicated.
3. Compared and contrasted the yields and maturities for each of the securities.
4. Successfully used the expectations theory to predict future interest rate changes.
5. Compared the relationship between maturities and yields between U.S. treasures, municipal bonds, and corporate bonds.
6. Presented a structured report that is free of spelling and grammatical errors and cited sources in APA format when necessary.

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Solution Preview

Part One: Quantitative Exercises
Barbow Enterprises, Inc., is considering an expansion in their operations. One of the first items they want to examine is their cost of capital. According to the accounting department, the following items and their respective costs have been identified:
The cost of Common Equity: 15%
The before tax cost of debt: 12%
No Preferred stock
They have also calculated the marginal ...

Solution Summary

Solution explains the Compare and contrast the yields and maturities and the cost of capital.

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Trading Sites, DRIPs and Bonds

Research Online Trading Sites and DRIPs
you will evaluate the choices in purchasing stock via online brokerage accounts (where you can buy and sell stock via the Internet) and the use of dividend reinvestment plans (known as DIPs and DRIPs) or mutual funds or index funds.
For online brokers, you will be looking for the requirements to open the accounts: costs, minimum balances, and other features. Because most DIPs or DRIPs are available from publicly traded companies, you can search their Web sites or a search engine on these plans and their requirements.
Perhaps the most famous and useful Web site for these programs is http://www.directinvesting.com/. You are to compare and contrast online brokerage to DIPs and DRIPs.
Required:
Research online trading sites and DRIPS as outlined below, and summarize your findings. Make sure to include a summary table of the relevant information.
1. Search three online trading sites, and determine the requirements for trading, including the price per trade. Compare and contrast the online trading companies. (2-3 pages)
2. Search the Web for three companies (look for investor information) that offer DIPs or DRIPs. (2-3 pages)
3. Compare and contrast the requirements, including minimum investments, nature of the return, costs, and other features. (1-2 pages)
Part B: Research Market Data on Bonds
Research the current (within the last two months) market data on bonds from AT&T, Dell, and IBM. Assume each bond has a par value of $1000, unless otherwise indicated. Cite your sources.
AT&T Dell IBM
Coupon 6.80% 6.50% 8.4%
Maturity 26 years 27 years 9 years
Frequency Semi annual Semi annual Semi annual
Rating A A- A+
Required:
1. Complete the table above.
2. Calculate the value of the bond if your required return is 5% on AT&T, 6.5% on Dell, and 8% on IBM.
3. Determine the yield to maturity (YTM) on the bonds given the current price. Based on each bond's ratings and your determination of its yield to maturity, explain how you rank each bond for risk and return.

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