1. What is the yield to maturity for an 8 percent bond, paying coupon semi-annually that has 15 years until maturity and sells for $975?
2. There are regulations that prohibit "insider trading," which is the use of nonpublic information about a security to earn abnormal profits from trading that security. Which form of market efficiency would make these laws unnecessary? Explain why.
3. Bayboro Sails is expected to pay dividends of $3.50, $4.00, and $5.00 in the next three years-D1, D2, and D3, respectively. After three years, the dividend is expected to grow at a constant rate equal to 5 percent per year indefinitely. Stockholders require a return of 15 percent to invest in the common stock of Bayboro Sails. Compute the value of Bayboro's common stock today, P0.
4. Suppose that an investor is considering the purchase of a bond due to mature in 30 years, carrying an 8 percent coupon rate (coupons are paid semi-annually). This security is available for purchase at a current market price of $975. The bond has a par value of $1000. If this investor redeems the bond 16 years later at a price of $990, what is his holding period yield, h?
5. Over the past year you earned a nominal rate of interest of 9 percent on your money. The inflation rate was 2.5 percent over the same period. Find he exact actual growth rate of your purchasing power.
6. Unlike common stocks, preferred stocks pay a fixed dividend. Suppose a share of preferred stock pays a fixed dividend of $4 a year forever. If it sells for $80, what must be the discount rate?
7. Consider a firm that pays no dividends. Next year's earnings are projected to be $1,500,000. The present value of growth opportunities is estimated to be $13,500,000. Suppose that there are 250,000 shares outstanding. If investors require a return of 12 percent, what is the fair value of the company's stock (Find the price per share)?
8. A 30-year maturity, 8% coupon bond paying coupons semiannually is callable in five years at a call premium of 9%. The bond currently sells at a yield to maturity of 5%. What is the yield to call?
9. You find a certain stock that had returns of 14 percent, -27 percent, 19 percent, and 21 percent for four of the last five years, respectively. What is the average return of the stock over this period? What is the standard deviation of the stock's returns?
10. Explain the difference between computing the value of a zero growth dividend-paying stock and computing the value of a constant growth dividend-paying stock.
11. Phoenix Industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a $1 per share dividend to be paid a year from now, the first dividend since the crisis. Analysts expect dividends to increase by 50 percent a year for another 2 years. Then they expect dividends to increase by 20 percent a year for another 2 years. After the fifth year, dividend growth is expected to settle down to a more moderate long-term growth rate of 6 percent. If the firm's investors expect to earn a return of 14 percent on this stock, what must be its price?
12. Over the period of 1926-2011, U. S. Treasury bills had an average return of 3.8 percent while inflation averaged 3.1 percent. Based on this historical record, is it safe to assume that an investor in U.S. Treasury bills will enjoy a positive real rate of return each year? Why or why not?
13. Sarro Shipping, Inc., expects to earn $1.3 million. There are 100,000 shares of stock outstanding, so earnings per share equal $13 ($1,300,000/100,000). The firm will have an opportunity at date 1 to spend $1,300,000 on a new marketing campaign. The new campaign will increase earnings in every subsequent period by $260,000 (or $ 2.6 per share). The firm's discount rate is 10 percent. What is the tangible value per share? What is franchise value per share? What is the intrinsic value per share?
14. Bond X is a 5 percent coupon bond. Bond Y is a 10 percent coupon bond. Both bonds have 8 years to maturity, make semiannual payments, and have a yield to maturity of 10 percent. If the interest rate suddenly falls by 1 percent, what is the percentage price change of these bonds? What about if the interest rate rises by 1 percent?What does this problem tell you about interest rate risk of lower-coupon bonds?
15. A stock has had returns of 11 percent, -8 percent, 6 percent, 21 percent, 24 percent, and 16 percent over the last six years, respectively. Compare the arithmetic and geometric returns for this stock?
16. Consider a bond paying a coupon rate of 8% per year semiannually when the market interest rate is only 5%. The bond has twenty years until maturity.
a. Find the bond's price today.
b. Find the bond's price six months from now after the next coupon is paid if the interest rate rises to 7%.
c. What is the total rate of return on the bond?