Assignment:
1. Watters Umbrella Corp. issued 20year bonds 2 years ago at a coupon rate of 5.4 percent. The bonds make semiannual payments. If these bonds currently sell for 85 percent of par value, what is the YTM?
2. Microhard has issued a bond with the following characteristics:
Par: $1,000
Time to maturity: 20 years
Coupon rate: 8 percent
Semiannual payments
Calculate the price of this bond if the YTM is
3. Yan Yan Corp. has a $2,000 par value bond outstanding with a coupon rate of 5.5 percent paid semiannually and 18 years to maturity. The yield to maturity of the bond is 6.2 percent. What is the dollar price of the bond?
4. The next dividend payment by ECY, Inc., will be $1.56 per share. The dividends are anticipated to maintain a growth rate of 4 percent, forever. The stock currently sells for $29 per share. What is the required return?
5. Schiller Corporation will pay a $3.14 per share dividend next year. The company pledges to increase its dividend by 5 percent per year, indefinitely. If you require a return of 12 percent on your investment, how much will you pay for the company's stock today?
6. The Starr Co. just paid a dividend of $1.90 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year, indefinitely. Investors require a return of 10 percent on the stock.
What is the current price?
What will the price be in three years?
What will the price be in 5 years?
7. Zoom stock has a beta of 1.46. The risk-free rate of return is 3.07 percent and the market rate of return is 11.81 percent. What is the amount of the risk premium on Zoom stock?
8. The risk premium for an individual security is computed by:
9. The risk-free rate of return is 3.68 percent and the market risk premium is 7.84 percent. What is the expected rate of return on a stock with a beta of 1.32?
10. Mullineaux Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 18 percent, and the cost of debt is 6 percent. The relevant tax rate is 30 percent. What is the company's WACC?
11. Miller Manufacturing has a target debt-equity ratio of .60. Its cost of equity is 15 percent, and its cost of debt is 4 percent. If the tax rate is 35 percent, what is the company's WACC?
12. Filer Manufacturing has 5 million shares of common stock outstanding. The current share price is $77, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value $60 million, a coupon of 6 percent, and sells for 97 percent of par. The second issue has a face value of $30 million, a coupon of 7 percent, and sells for 105 percent of par. The first issue matures in 21 years, the second in 4 years.
a. What are the company's capital structure weights on a book value basis?
b. What are the company's capital structure weights on a market value basis?
c. Which are more relevant?
13. Titan Mining Corporation has 8.7 million shares of common stock outstanding and 310,000 6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $35 per share and has a beta of 1.35, and the bonds have 20 years to maturity and sell for 116 percent of par. The market risk premium is 7.5 percent, Tbills are yielding 5 percent, and the company's tax rate is 30 percent.
a. What is the firm's market value capital structure?
b. If the company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows?