A 5-year, 6% annual-compounding bond priced to yield 8%.

a. Calculate the Macaulay duration of the bond.

b. Calculate the bond price.

c. Calculate the modified duration of the bond.

d. According the modified duration, what is the estimated bond price if the market yields decline to 7%?

e. Using financial calculator, calculate the actual bond price if rate does drop to 7%?

f. How does the actual bond price compare to the price predicted by the modified duration? Explain the reason for the difference.

g. Find the effective duration using 100 basis points change in interest rate.

Suppose that call options on ExxonMobil stock with time to expiration 3 months and strike price $92 are selling at an implied volatility of 32%. ExxonMobil stock currently is $92 per share, and the risk-free rate is 3%. If you believe the true volatility of the stock is 36%.

a. If you believe the true volatility of the stock is 36%, would you want to buy or sell call options? Buy call options Sell call options

b. Now you need to hedge your option position against changes in the stock price. How many shares of stock will you hold for each option contract purchased or sold?

A store has 5 years remaining on its lease in a mall. Rent is $2,000 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,600 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month).

1. Should the new lease be accepted? (Hint: Be sure to use 1% per month.)

   -Select-YesNoItem 1

2. If the store owner decided to bargain with the mall's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV of the old lease's original cost at t = 9; then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

3. The store owner is not sure of the 12% WACC—it could be higher or lower. At what nominal WACC would the store owner be indifferent between the two leases? (Hint: Calculate the differences between the two payment streams; then find its IRR.) Do not round intermediate calculations. Round your answer to two decimal places.

Short Essay,

Explain how rational investors value assets (i.e., what factors they consider when pricing stocks, bonds, and other assets). Provide examples and other evidence to support your answer.  

The market consensus is that Analog Electronic Corporation has an ROE of 9% and a beta of 1.25. It plans to maintain indefinitely its traditional plowback ratio of 2/3. This year's earnings were $3 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 14%, and T-bills currently offer a 6% return.

c. Calculate the present value of growth opportunities. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

d. Suppose your research convinces you Analog will announce momentarily that it will immediately reduce its plowback ratio to 1/3. Find the intrinsic value of the stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $12.6 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $15.12 million. Under Plan B, cash flows would be $2.2389 million per year for 20 years. The firm's WACC is 11%.

1. Construct NPV profiles for Plans A and B. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. If an amount is zero, enter "0". Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.

   Discount Rate		NPV Plan A	NPV Plan B
   0	%	$    million	$    million
   5		million	million
   10		million	million
   12		million	million
   15		million	million
   17		million	million
   20		million	million

   Identify each project's IRR. Do not round intermediate calculations. Round your answers to two decimal places.

   Project A:   %

   Project B:   %

   Find the crossover rate. Do not round intermediate calculations. Round your answer to two decimal places.

     %

2. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 11%?

   -Select-Yes/ No

   If all available projects with returns greater than 11% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 11%, because all the company can do with these cash flows is to replace money that has a cost of 11%?

   -Select-Yes/ No

   Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?

   -Select-Yes/ No

For the last 12 years, you deposited a certain amount of money each week into a bank account whose annual rate is 1.9% with weekly compounding. If the account has $74,665 today, how much interest has the account earned?

Anti-trust legislation keeps firms from merging to create monopoly power. However, if a firm grows organically to attain monopoly power, it cannot be broken apart. True or False?

The acquirer’s due diligence and evaluation of the target firm are two entirely separate processes. True or False?

Free cash flows are cash flows that are available to all of the firm’s investors and are therefore used to value the firm as a whole (both debt and equity claims). True or False?

Marie's Fashions is considering a project that will require $30,000 in net working capital and $95,000 in fixed assets. The project is expected to produce annual sales of $99,000 with associated costs of $50,000. The project has a 5-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 33 percent. Calculate operating cash flow. (Do not include the dollar signs ($). Round your answers to the nearest whole dollar amount. (e.g., 32))

An investor estimates that next​ year's sales for​ Dursley's Hotels,​ Inc., should amount to about ​$96 million. The company has 4.5 million shares​ outstanding, generates a net profit margin of about 8.8​%, and has a payout ratio of 42​%. All figures are expected to hold for next year. Given this​ information, compute the following.

a. Estimated net earnings for next year.

b. Next​ year's dividends per share.

c. The expected price of the stock​ (assuming the​ P/E ratio is 24.9 times​ earnings).

d. The expected holding period return​ (latest stock​ price: ​$32.87 per​ share).

Allen starts putting away $400 each month starting at the age of 25 in mutual funds earning about 7.5% per year. Beth invests the same funds but starts putting away $800 each month starting at age 33. How much money does each person have at age 60? Who ends up with more retirement money?

A Euro-Zone bond portfolio manager is looking to invest € 1,000,000. She has a choice between either a Euro-denominated bond with a 4% annualized return, and a 6-month (180 days) maturity, or a New Zealand dollar (NZD)- denominated bond with a 7% annualized return and also a 6-month maturity. Both bonds are AA rated. If the portfolio manager is not allowed to take any FX risk (meaning she must hedge all FX risks), which of the two bonds should she choose in order to maximize her return?

Market data:

NZD/EUR Spot rate: 1.8550 / 1.8600

NZD/EUR 6-month forward rate: 1.8900 / 1.8950

Assume a 360-day year.

Part A.

True or False?

“Long Straddle generates large losses when the underlying stock price decreases significantly.”

Discuss your original answer with example.

Part B.

True or False?

“According to the Risk-Neutral Valuation, the option price should be determined using probabilities in the actual world.”

Discuss your original answer with example.

Given the net cash flow for two machines as shown below, what is the benefit cost ratio for the difference in the benefits and costs for the higher initial cost machine and the lower initial cost machine if the MARR is 12%?

Introduction: The Assignment requires the application of the Net Present Value (NPV) model to assess investment options given cost of capital, commonly referred to as discount rates, and required rates of returns. You will explain the role of a discount rate in evaluating the NPV model and compare investment options as cost of capital increases or decreases. The use of a financial calculator will be required in this Assignment.

The following course outcome is assessed in this Assignment:

MT480-4: Assess investment options based upon cost of capital and expected returns.

Read the scenario and address all of the checklist items.

Scenario: A new product manager presents to you, the Chief Financial Officer, a proposal to expand operations that includes the purchase of a new machine. The product manager is certain that the positive cash flows, which exceed the initial outlay by $20,000 by the end of year 4, will bring both praise and approval. You explain the company uses a 12% discount rate for cash flows and project related budgeting. You take the time to present the details of the Net Present Value (NPV) model used to assess product proposals. The data is below.

Project Outflows to Buy Machine      

Day 1 Cash Out                     -$70,000 12% discount rate applied.

End Year 1 Cash Repayment            $10,000

End Year 2 Cash Repayment            $20,000

End Year 3 Cash Repayment            $30,000

End Year 4 Cash Repayment            $30,000

To educate the new manager, and as CFO, you take the time to evaluate the following:

Checklist:

• Evaluate how the Time Value of Money concept results in a discounted cash flow in year 4 (an amount less than $30,000).
• Assess the investment option using a 12% cost of capital discount rate by applying the NPV model. Include values in your assessment. Provide the NPV at a 12% cost of capital discount rate. Include values in your assessment.
• Assess the investment option when a 7% cost of capital discount rate, versus a 12% cost of capital discount rate is applied. Include values in your assessment. Provide the NPV at a 7% cost of capital discount rate.