Problem1. Ima's sister, Uma, has done her own analysis of the economy and Walnut’s stock. Uma used recession, stable growth, and inflation scenarios, however with different probabilities and expected stock returns. Uma thinks the probability of recession is quite high, at 60 percent, and that in a recession, Walnut’s stock return will be -20 percent. Uma believes the scenarios of constant growth and inflation are equally like and that Walnut’s returns will be 15 percent in constant expansion scenario and 10 percent under the inflation scenario.
a. What is the Uma's expected return forecast for Walnut stock?
b. What is standard deviation of the forecast?
c. If Walnut’s current price is $20.00 per share and id anticipated to pay a dividend of $.080 per share next year, what price does Uma expect walnut to sell for in 1 year?
Problem2. Hillard Manufacturing sold an issue of bonds with the 10-year maturity, a $1,000 par value, a 10% coupon rate and semi-annual interest payments.
a. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell?
b. Assume that, 2 years after the initial offering, the going interest rate had risen to 12%. At what price would bonds sell?
c. Assume, as in part A that interest rates fell to 6% 2 years after the issue date. Assume further that the interest rate remained at 6% for the next 8 years. What would happen to price of bonds over time?