1. Calculate the price of the following semi-annual coupon bond (issued on 1/1/2015) AS OF 1/1/2018. Coupon payments occur on 6/30 and 12/31 of each year so the first coupon payment took place on 6/30/2015, and the last coupon payment will occur on 12/31/2024.
Coupon Rate = 6%Life of Bond = 10 years (from issuance)Face Value = $100YTM = 4%
2. Using the CAPM approach for the cost of equity, calculate the WACC for a company with the following capital sources.
Number of common shares outstanding = 100,000,000Price of Stock = $25.00
Number of preferred shares outstanding = 0Market Risk Premium = 7%
Amount of Bank Loan = $100,000,000Risk-Free Rate = 2%
Interest Rate of Bank Loan = 5.5% annual rateBonds Outstanding = 250,000
Market Price of Bonds = 110% of Par Value, or $1,100Bond YTM = 4%
Tax Rate = 30% Company's Beta = 1.2
3. On January 1, 1995, the yield of a 10-year treasury bond (generally accepted as the risk-free rate) was 7.78%. Twenty years later, on January 1, 2015, the yield of a 10-year treasury bond was 1.88%. If a company had a Beta of 2 at both points in time, and the market risk premium (equal to E(Rm) - Rf) was a constant 6% over the twenty years, how much cheaper was this company's Cost of Common Equity on 1/1/2015 compared to 1/1/1995? (Hint: Use the CAPM approach)
4. Calculate the interest rate on a credit card whose balance doubles every six years (if no payments are made and no fees are charged) using the Rule of 72. Now compare that to the actual interest rate calculated by the Future Value formula on the slide titled "Moving Values Through Time," in Lecture 10. (Hint: make the future value equal twice the present value to account for the doubling. Solve for i)
5. You take out a loan to buy a brand new car. The finance guy at the car dealership tells you the APR is 8%. Calculate the Effective Annual Rate (EAR) if the interest compounds annually, quarterly, monthly AND continuously.