YIELD TO MATURITY

A firm's bonds have a maturity of 8 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 4 years at $1,144, and currently sell at a price of $1,265.82.

1. What is their nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.
   
   %
   
2. What is their nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places.
   
   %
   
3. What return should investors expect to earn on these bonds?
   
   1. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
   2. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
   3. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
   4. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
   5. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.

3. Assume that the liquidity of corporate bonds improves a little bit, relative to US Treasury bonds. Given this, we would expect that the yield on US Treasury bonds will _____ and the yield on corporate bonds will _____.

Group of answer choices

rise; rise

rise; fall

fall; rise

fall; fall

4. Analysts predict that short-term interest rates over the next 4 years will be as follows: 5%, 8.5%, 12%, and 1%, respectively. According to expectations theory, the yield on a discount bond with a three year maturity will be ____ and yield on bond with a four year maturity will be ____.

Group of answer choices

8.2%; 7.4%

8.2%; 6.6%

8.5%; 7.4%

8.5%; 6.6%

5. An investor has $100 to invest and she invests in short-term, one year discount bonds over the next 3 years. The forecast for one-year interest rates over the next 3 years is 4.5%, 7.5% and 10.5%. What is the future value of her investment, three years from today?

Group of answer choices

$124.13

$133.35

$137.50

$139.55

Suppose that a company's equity is currently selling for $24.75 per share and that there are 3.3 million shares outstanding and 13 thousand bonds outstanding, which are selling at 94 percent of par. If the firm was considering an active change to their capital structure so that the firm would have a D/E of 0.6, which type of security (stocks or bonds) would they need to sell to accomplish this, and how much would they have to sell? (Round your intermediate ratio to 4 decimal places.)

• $20,051,213 in new equity

• $23,035,265 in new debt

• $23,035,265 in new equity

• $20,051,213 in new debt

BOND VALUATION

1.) An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 6% annual coupon. Bond L matures in 20 years, while Bond S matures in 1 year.

Assume that only one more interest payment is to be made on Bond S at its maturity and that 20 more payments are to be made on Bond L.

1. What will the value of the Bond L be if the going interest rate is 4%? Round your answer to the nearest cent.
   $
   
   What will the value of the Bond S be if the going interest rate is 4%? Round your answer to the nearest cent.
   $
   
   What will the value of the Bond L be if the going interest rate is 9%? Round your answer to the nearest cent.
   $
   
   What will the value of the Bond S be if the going interest rate is 9%? Round your answer to the nearest cent.
   $
   
   What will the value of the Bond L be if the going interest rate is 11%? Round your answer to the nearest cent.
   $
   
   What will the value of the Bond S be if the going interest rate is 11%? Round your answer to the nearest cent.
   $
   
2. Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?
   
   1. Long-term bonds have greater interest rate risk than do short-term bonds.
   2. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
   3. Long-term bonds have lower interest rate risk than do short-term bonds.
   4. Long-term bonds have lower reinvestment rate risk than do short-term bonds.
   5. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.

Assume ABC Corporation is expected to pay a dividend in the amount of $3 and the dividend is expected to grow at a constant rate of 5 percent. What is the expected rate if the stock is currently trading at $50 a share? What is the dividend yield? What is the capital gain rate?

Prepare a statement of operations: (only 1 year)

Revenue from patients: $5,000,000, Medical services $ 600,000; Therapy services $100,000; support services $200,000, General services $ 300,000, Depreciation $150,000, Interest $ 50,000; interest income $1,000

------------------------------------------

Revenue:

Net Patient Service Revenue

Total Operating Revenue

Operating Expense:

....

Total Operating Expenses:

Income from operations:

Nonoperating Gains (Losses)

Interest Income:

Net Nonoperating Gains:

Revenue and Gains in Excess of Expenses and Losses:

Increase in Unrestricted Fund Balance:

16. Bond Price Movements Miller Corporation has a premium bond making semiannual payments. The bond has a coupon rate of 8.2 percent, a YTM of 6.2 percent, and 13 years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond has a coupon rate of 6.2 percent, a YTM of 8.2 percent, and also has 13 years to maturity. If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now assuming both bonds have a par value of $1,000? In 3 years? In 8 years? In 12 years? In 13 years? What’s going on here? Illustrate your answers by graphing bond prices versus time to maturity.

4.7

Baker Industries’ net income is $24,000, its interest expense is $6,000, and its tax rate is 25%. Its notes payable equals $23,000, long-term debt equals $70,000, and common equity equals $245,000. The firm finances with only debt and common equity, so it has no preferred stock. What are the firm’s ROE and ROIC? Do not round intermediate calculations. Round your answers to two decimal places.

ROE:   %

ROIC:   %

1. ABC Corporation currently has an Inventory Turnover of 13.99, an Accounts Receivable Turnover of 24.52, and an Accounts Payable Turnover of 19. How many days are in the operating cycle?

2.

Indicate the effect of the following on the cash cycle: Accounts Receivable Period (AR Period) goes up

Note: AR Period is also called as the Average Collection Period

Group of answer choices

* No change

* Increase

* Decrease

Find the net present value (NPV) for the following series of future cash flows, assuming the company’s cost of capital is 6.64 percent. The initial outlay is $339,858. Year 1: 163,676 Year 2: 147,656 Year 3: 123,800 Year 4: 178,407 Year 5: 149,077 Round the answer to two decimal places.

What is a financial market? What is a financial institution? Why are they so important? Would you let one or many financial institutions fail?

6. Analysis of an expansion project

Companies invest in expansion projects with the expectation of increasing the earnings of its business.

Consider the case of Black Sheep Broadcasting:

Black Sheep Broadcasting is considering an investment that will have the following sales, variable costs, and fixed operating costs:

This project will require an investment of $25,000 in new equipment. The equipment will have no salvage value at the end of the project’s four-year life. Black Sheep Broadcasting pays a constant tax rate of 40%, and it has a required rate of return of 11%.

When using accelerated depreciation, the project’s net present value (NPV) is _____ . (Hint: Round each element in your computation—including the project’s net present value—to the nearest whole dollar.)

When using straight-line depreciation, the project’s NPV is ______ . (Hint: Again, round each element in your computation—including the project’s net present value—to the nearest whole dollar.)

Using the ______ depreciation method will result in the greater NPV for the project.

No other firm would take on this project if Black Sheep Broadcasting turns it down. How much should Black Sheep Broadcasting reduce the NPV of this project if it discovered that this project would reduce one of its division’s net after-tax cash flows by $700 for each year of the four-year project?

$1,629

$2,172

$1,846

$1,303

The project will require an initial investment of $25,000, but the project will also be using a company-owned truck that is not currently being used. This truck could be sold for $9,000, after taxes, if the project is rejected. What should Black Sheep Broadcasting do to take this information into account?

A. The company does not need to do anything with the value of the truck because the truck is a sunk cost.

B. Increase the NPV of the project by $9,000.

C. Increase the amount of the initial investment by $9,000.

Recently, Congress has passed legislation lowering the mortgage interest deduction limit from $1,000,000 to $750,000.

A. What is the mortgage interest deduction? Which types of mortgage borrowers benefit most from it, and why?

B. The mortgage interest deduction is often criticized by economists and others. What are some of the key problems or issues which are highlighted by these critics? Can you think of any counterarguments?

C. Thinking about the user cost model we studied in class, what effect would cutting or eliminating the mortgage interest deduction have on the cap rate for residential real estate. Would this effect be larger when interest rates are low or when rates are high? Explain.

The following is a quote from The Economist (Dec. 3, 2016):

“The dollar has been gradually gaining strength for years. But the prompt for this latest surge is the prospect of a shift in the economic-policy mix in America. The weight of investors’ money has bet that Mr. Trump will cut taxes and spend more public funds on fixing America’s crumbling infrastructure. A big fiscal boost would lead the Federal Reserve to raise interest rates at a faster rate to check inflation. America’s ten-year bond yield has risen to 2.3%, from almost 1.7% on election night. Higher yields are a magnet for capital flows.”

There has also been Fed attempts to raise interest rates recently.

EXPLAIN IN A PARAGRAPH: Will higher US interest rates strengthen the USD? Agree or disagree. Explain fully. Also, will the resulting change in the USD (from your analysis) be consistent with President Trump’s overall economic perspective on trade and US manufacturing.

Please address these questions from a Jan. 1, 2017 perspective for that time period.