How do bond ratings and interest rate spreads on bonds differ? Which measure is considered by many investors to be a more comprehensive measure of risk? Why?

Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 0.8 10 % 25 % B 1.0 12 10 C 1.2 14 20 a. If σM = 20%, calculate the variance of returns of securities A, B, and C. (Do not round intermediate calculations. Round your answers to the nearest whole number.) b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C? (Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number.)

Last year Carson Industries issued a 10-year, 12% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,060 and it sells for $1,150.

1. What are the bond's nominal yield to maturity and its nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places.

   YTM:   %

   YTC:   %

   Would an investor be more likely to earn the YTM or the YTC?

   -Select-Since the YTM is above the YTC, the bond is likely to be called.Since the YTC is above the YTM, the bond is likely to be called.Since the YTM is above the YTC, the bond is not likely to be called.Since the YTC is above the YTM, the bond is not likely to be called.Since the coupon rate on the bond has declined, the bond is not likely to be called.Item 3

2. What is the current yield? (Hint: Refer to Footnote 6 for the definition of the current yield and to Table 7.1) Round your answer to two decimal places.

     %

   Is this yield affected by whether the bond is likely to be called?

   1. If the bond is called, the capital gains yield will remain the same but the current yield will be different.
   2. If the bond is called, the current yield and the capital gains yield will both be different.
   3. If the bond is called, the current yield and the capital gains yield will remain the same but the coupon rate will be different.
   4. If the bond is called, the current yield will remain the same but the capital gains yield will be different.
   5. If the bond is called, the current yield and the capital gains yield will remain the same.

   -Select-IIIIIIIVVItem 5

3. What is the expected capital gains (or loss) yield for the coming year? Use amounts calculated in above requirements for calculation, if required. Negative value should be indicated by a minus sign. Round your answer to two decimal places.

     %

   Is this yield dependent on whether the bond is expected to be called?
   1. The expected capital gains (or loss) yield for the coming year does not depend on whether or not the bond is expected to be called.
   2. If the bond is expected to be called, the appropriate expected total return is the YTM.
   3. If the bond is not expected to be called, the appropriate expected total return is the YTC.
   4. If the bond is expected to be called, the appropriate expected total return will not change.
   5. The expected capital gains (or loss) yield for the coming year depends on whether or not the bond is expected to be called.

Calculate the value of a stock with the following expectations for dividend payments: $1.75 in Year 1, $2.00 in Year 2, and then annual dividend growth of 1.5% per year indefinitely. Assume a discount rate of 9%. Solve the problem two different ways: first by using the algebraic formula for the Gordon Growth Model combined with PV of uneven dividend payments, then by using Excel to calculate and sum the dividends and their respective present values for the next 150 years. hint: Use the Uneven, then Const. Growth Dividend

1. Net Present Value MethodA series of equal net cash flows at fixed time intervals.—Annuity

   Briggs Excavation Company is planning an investment of $611,700 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for eight years. Customers will be charged $150 per hour for bulldozer work. The bulldozer operator costs $30 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $20,000. The bulldozer uses fuel that is expected to cost $39 per hour of bulldozer operation.

   Present Value of an Annuity of $1 at Compound Interest
   Year	6%	10%	12%	15%	20%
   1	0.943	0.909	0.893	0.870	0.833
   2	1.833	1.736	1.690	1.626	1.528
   3	2.673	2.487	2.402	2.283	2.106
   4	3.465	3.170	3.037	2.855	2.589
   5	4.212	3.791	3.605	3.353	2.991
   6	4.917	4.355	4.111	3.785	3.326
   7	5.582	4.868	4.564	4.160	3.605
   8	6.210	5.335	4.968	4.487	3.837
   9	6.802	5.759	5.328	4.772	4.031
   10	7.360	6.145	5.650	5.019	4.192

   a. Determine the equal annual net cash flows from operating the bulldozer. Use a minus sign to indicate cash outflows.

   Briggs Excavation Company
   Equal Annual Net Cash Flows
   Cash inflows:
   Hours of operation Fuel and labor costs per year Hours of operation Maintenance costs per year Total fuel and labor costs per hour
   Revenue per hour Fuel and labor costs per year Fuel cost per hour Labor cost per hour Revenue per hour		X $
   Revenue per year Fuel and labor costs per year Fuel cost per hour Labor cost per hour Revenue per year			$
   Cash outflows:
   Hours of operation Fuel and labor costs per year Hours of operation Maintenance costs per year Total fuel and labor costs per hour
   Fuel cost per hour Annual net cash flows Fuel cost per hour Revenue per year Revenue per hour	$
   Labor cost per hour Annual net cash flows Labor cost per hour Revenue per year Revenue per hour
   Total fuel and labor costs per hour Annual net cash flows Total fuel and labor costs per hour Revenue per year Revenue per hour		X $
   Fuel and labor costs per year Annual net cash flows Fuel and labor costs per year Revenue per year Revenue per hour
   Maintenance costs per year Annual net cash flows Maintenance costs per year Revenue per year Revenue per hour
   Annual net cash flows Annual net cash flows Hours of operation Revenue per year Revenue per hour			$

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   b. Determine the net present value of the investment, assuming that the desired rate of return is 15%. Use the The sum of the present values of a series of equal “Net cash flows” to be received at fixed time intervals.present value of an annuity of $1 table above. Round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.

   Present value of annual net cash flows	$
   Amount to be invested	$
   Net present value	$

   c. Should Briggs Excavation invest in the bulldozer, based on this analysis?
   

   • Yes
   • No
   , because the bulldozer cost is
   • less than
   • more than
   the present value of the cash flows at the minimum desired rate of return of 15%.

   d. Determine the number of operating hours such that the present value of cash flows equals the amount to be invested. Round interim calculations and final answer to the nearest whole number.
   hours

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   b. Multiply the annual net cash flow by the present value of an annuity factor and subtract the amount to be invested.

   c. Which is more favorable?

   d. Set up an equation to solve for hours.

   Learning Objective 3.

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The Company expects its dividends to be $85,000 every other year forever, with the first payment occurring two years from today. The firm can borrow at an EAR of 11%, currently has no debt, and has an effective annual cost of equity of 18%. The corporate tax rate is 35%. Assume tax credits for losses and no financial distress costs.

(a) Calculate the value of the firm. Explain the answer.

(b) What will firm value be if it borrows $60,000 in permanent debt with annual coupon payments and uses the proceeds to repurchase its shares?

Lancaster Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 85; and it currently pays on the 5^th day and takes discounts. Lancaster plans to expand, which will require additional financing. Assume 365 days in year for your calculations.

1. If Lancaster decides to forgo discounts, how much additional credit could it obtain? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.
   $
2. 
   
3. What would be the nominal cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places.
   %
4. 
   
5. What would be the effective cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places.
   %
6. 
   
7. If the company could get the funds from a bank at a rate of 7%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Do not round intermediate calculations. Round your answer to two decimal places.
   %
8. Should Lancaster use bank debt or additional trade credit?
   -Select-Bank debtAdditional trade creditItem 5

Parramore Corp has $12 million of sales, $2 million of inventories, $2 million of receivables, and $2 million of payables. Its cost of goods sold is 75% of sales, and it finances working capital with bank loans at an 9% rate. Assume 365 days in year for your calculations. Do not round intermediate steps.

1. What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places.
     days
2. 
   
3. If Parramore could lower its inventories and receivables by 11% each and increase its payables by 11%, all without affecting sales or cost of goods sold, what would be the new CCC? Do not round intermediate calculations. Round your answer to two decimal places.
     days
4. 
   
5. How much cash would be freed up, if Parramore could lower its inventories and receivables by 11% each and increase its payables by 11%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.
   $
6. 
   
7. By how much would pretax profits change, if Parramore could lower its inventories and receivables by 11% each and increase its payables by 11%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.
   $

1. TRUE OR FALSE By accepting a lot of capital budgeting projects with a high level of fixed costs I can inadvertently increase my operating leverage and business risk to the firm.
2. TRUE OR FALSE The higher the debt, the higher the financial risk, but since you decrease the # shares and equity you should see higher EPS and ROE.
3. TRUE OR FALSE A firm should pay out a dividend if they cannot earn a better rate of return than the stockholder and the clientele effect is when a firm reduces a dividend and investors are indifferent.
4. TRUE OR FALSE A firm has a decent coverage ration if has EBIT of 10 million and interest expense of 10.5 million
5. TRUE OR FALSE If the current ratio is above 1, a firm can meet its short term obligations.

1.A bond currently trades at $1,045.00 and has a face value of $1,000. If the annual yield is 6% and the bond has 19 years to maturity, what is its coupon rate?

2. A bond maturing in 7 years at a par value of $1,000 has a coupon rate of 6% and current yield of 7%. What is the price of the bond?

​A(n) 8.5​%, ​25-year bond has a par value of​ $1,000 and a call price of ​$1050. ​(The bond's first call date is in 5​ years.) Coupon payments are made semiannually​ (so use semiannual compounding where​ appropriate). a. Find the current​ yield, YTM, and YTC on this​ issue, given that it is currently being priced in the market at $ 1175. Which of these 3 yields is the​ highest? Which is the​ lowest? Which yield would you use to value this​ bond? Explain. b. Repeat the 3 calculations​ above, given that the bond is being priced at ​$825. Now which yield is the​ highest? Which is the​ lowest? Which yield would you use to value this​ bond?

You’ve identified a comparable firm for a new division you are heading up. The comparable has an equity beta of 1.4 and its debt has a beta of 0.3. The equity of the comparable has a market value of $30B and has $4B in debt outstanding. The market risk premium is 6% and the risk-free rate is 2%. What is the appropriate discount rate to use for your division’s assets/projects?

A 30-year, $200,000 adjustable-rate mortgage starts out with the rate of 4%. The borrower makes only the required payments in the first year. If after one year the rate resets to 4.4%, what is the new required payment?