Financial Management
Rules for all problem sets:
· Do your own work. Do not copy material from others.
· Problem sets must be submitted in hard copy form. Do not submit electronically.
Question 1
Everything else being equal, what would happen to a bond's price if Moody's changes this bond rating from Baa to A? Explain.
Question 2
Given the following bond's characteristics.
Par value $1,500 Annual coupon 6.25%, interest payable semi-annually
Maturity 7 years Bond price $1,406
A. Using Excel ONLY, determine this bond's annual "yield-to-maturity." Round percentage answer to 2 decimal points (e.g.: 4.75%, 9.53%, etc.) Attach Excel print-out with appropriate formula and answer.
B. Is this bond priced at premium or discount?
Question 3
You expect interest rates to decrease. From the corporate finance viewpoint, should you currently issue short term or long term bonds? Explain.
Question 4
Given the following financial data for the U.S. economy and a specific company.
U.S. economy:
· U.S. Treasuries annual yield: 2.3%
· Prime rate: 3.5%
· Expected rate of return on stock market: 7.0%
· Inflation rate 2.5%
Company:
· Beta value: 0.85
· Stock price: $50/share
· Earnings per share: $5.00
Based on the above information, calculate this company's "rate of return stockholders require." Show all calculations.