Assets, Inc., plans to issue $8 million of bonds with a coupon rate of 6 percent, a par value of $1,000, semiannual coupons, and 30 years to maturity. The current market interest rate on these bonds is 10 percent. In one year, the interest rate on the bonds will be either 10 percent or 4 percent with equal probability.

Assume investors are risk-neutral. a. If the bonds are noncallable, what is the price of the bonds today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Price of Bonds = ______

Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of r_d = 9% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (D₀) was $2.75, its expected constant growth rate is 6%, and its common stock sells for $30. EEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 12%, and Project B's return is 11%. These two projects are equally risky and about as risky as the firm's existing assets.

1. What is its cost of common equity? Round your answer to two decimal places. Do not round your intermediate calculations.
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2. What is the WACC? Round your answer to two decimal places. Do not round your intermediate calculations.

2. To create a portfolio with a duration of 4 years using a 5 year zero coupon bond and a 2 year 6% annual coupon bond with a yield to maturity of 8%, one would have to invest______ of the portfolio value in the zero coupon bond.

You think a certain stock in the gold-mining industry (stock A) is overvalued, so you plan on shorting $10,000 of it. You would like to isolate your bet on the alpha of the stock, so you want to hedge out all your exposure to the market and to the gold-mining industry. Stock A has a market beta of 1.1, and a gold-mining industry beta of 1.5. Asset B (a gold-miners ETF) has a market beta of 0.8 and a gold-mining industry beta of 1.5 Asset C (SPY) has a market beta of 1 and a gold-mining industry beta of 0.2. If you used assets B and C to get a portfolio that had a market beta and gold-mining industry beta of 0, How many dollars would you put in Asset B? How many dollars would you put in Asset C?

Consider the following $1,000 par value zero-coupon bonds:

a. According to the expectations hypothesis, what is the market’s expectation of the one-year interest rate three years from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What are the expected values of next year’s yields on bonds with maturities of (a) 1 year; (b) 2 years; (c) 3 years? (Do not round intermediate calculations. Round your answer to 2 decimal places.

1. A 30 year maturity corporate bond has a 8% coupon rate with coupons paid annually. The bond currently sells for $875.50. A bond market analyst forecasts that in 8 years, yield on such bonds will be at 10%. You believe you will be able to reinvest the coupons earned over the next 8 years at a 5% rate of return. What is your expected annual compound rate of return if your plan on selling the bond in 8 years?

Cost of debt using both methods​ (YTM and the approximation​ formula)   ​Currently, Warren Industries can sell 15 dash year $1,000 ​-par-value bonds paying annual interest at a 11​% coupon rate. As a result of current interest​ rates, the bonds can be sold for $1,100 each before incurring flotation costs of ​$30 per bond. The firm is in the 40​% tax bracket. a.  Find the net proceeds from the sale of the​ bond, Upper N d

b.  Calculate the​ bond's yield to maturity (YTM​) to estimate the​ before-tax and​ after-tax costs of debt.

c.  Use the approximation formula to estimate the​ before-tax and​ after-tax costs of debt.

a.  The net proceeds from the sale of the​ bond,

Upper N d is

​

Liman Company has a single product whose selling price is $140 and whose variable expense is $60 per unit. The company’s fixed expense is $40,000. REQUIRED Using the equation method, solve for the units required to earn a target profit of $6,000 Selling price – Variable expenses – Fixed Expenses = Target profit 140U – 60U – 40,000 = 6,000 80U = 46,000 46,000 / 80 = 575 units (Fixed Costs + Target Income)/CM 46,000 / 80 Using the formula method, solve for the dollar sales that are required to earn a target profit of $8,000 If tax rate is 40%, how many units should be sold to earn a target after tax profit of $6,000? Selling price – Variable expenses – Fixed Expenses = Target profit / (1 – T) 140U – 60U – 40,000 = 6,000 / (1 - .40) 140U – 60U – 40,000 = 6,000/.60 80U – 40,000 = 10,000 80U = 50,000 50,000/80

1. Provide Modigliani and Miller’s explanation of how debt affects firm value and the WACC. Begin with the perfect (no taxes) case, and expand it to the world with taxes.

A project that costs $2,500 to install will provide annual cash flows of $750 for each of the next 5 years.

a. Calculate the NPV if the opportunity cost of capital is 10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV $

b. Is this project worth pursuing? Yes No

c. What is the project's internal rate of return IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places.) IRR %

Sunland Handicrafts, Inc., has net sales of $3.20 million with 50 percent being credit sales. Its cost of goods sold is $1.92 million. The firm’s cash conversion cycle is 51.5 days, and its operating cycle is 86.5 days. What is the firm’s accounts payable?

Your landscaping company can lease a truck for $7,200 a year for 6 years. It can instead buy the truck for $35,000. The truck will be valueless after 6 years. a. What is the present value of the lease payments, if the opportunity cost of capital is 7%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value $ b. Is it cheaper to buy or lease? Lease Buy

Problem 5

5.1 Gordon’s model of equity valuation assumes k < g. (True / False)

5.2 High P/E multiple may indicate, all else equal:

              a. High growth

              b. Low systematic risk

              d. Overvaluation

              e. Any of the above

5.3 Under Gordon’s model of equity valuation, the same dividend amount is paid out in perpetuity. (True / False)

5.4 Retention ratio is the percentage of earnings that is paid out as dividends. (True / False)

5.5 Firm X is priced at $10 per share. Expected dividend next year is $1 per share, and the expected stock price next year is $11. Therefore, stock is expected to earn (11 + 1 – 10)/10 = 20%. This implies that the company has required rate of return that is also 20%. (True / False)

5.6 When ROE < k, increasing _______ should increase the intrinsic value of equity.

              a. Retention ratio

              b. Dividend payout

              c. Dividend growth rate

5.7 Present Value of Growth Opportunities PVGO can never be negative. (True / False)

5.8 Required rate of return on equity can be found from which formula?

              a. CAPM

              b. Gordon’s Model

              c. ROE

              d. Either of the above, depends on what information is provided

5.9 If the company is correctly priced under Gordon’s model, and changing dividend payout policy does not change stock price, it must be that

              a. ROE = k

              b. The company is a cash cow

              c. PVGO > 0

5.10 Growth in dividends can be represented as sustainable growth rate in Gordon’s model. (True / False)