Assets, Inc., plans to issue $6 million of bonds with a coupon rate of 7 percent, a par value of $1,000, semiannual coupons, and 10 years to maturity. The current market interest rate on these bonds is 8 percent. In one year, the interest rate on the bonds will be either 8 percent or 4 percent with equal probability. Assume investors are risk-neutral.

You are a consultant to a mid-sized manufacturing corporation that is considering an investment project. The project requires an initial investment of $100 million and will generate an after tax cash of $20 million in the first year and the cash flow will increase 5% thereafter every year (Please note that this is a constant growing cash flow).The project’s beta is 1.5. Assuming that rf=5% and E ( rM ) = 12%, Please answer the following questions.

What is the net present value of the project ?
What is the highest possible discount rate for the project before its NPV becomes negative ?
What is the highest possible beta estimate for the project before its NPV becomes negative ?

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a rate of 8%. The probability distribution of the risky funds is as follows:

The correlation between the fund returns is 0.10.

Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio. (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)

Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $50,000 and sell its old low-pressure glueball, which is fully depreciated, for $8,000. The new equipment has a 10-year useful life and will save $12,000 a year in expenses. The opportunity cost of capital is 10%, and the firm’s tax rate is 21%. What is the equivalent annual saving from the purchase if Gluon can depreciate 100% of the investment immediately.

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a rate of 6%. The probability distribution of the risky funds is as follows:

The correlation between the fund returns is 0.13.

You require that your portfolio yield an expected return of 11%, and that it be efficient, on the best feasible CAL.

a. What is the standard deviation of your portfolio? (Round your answer to 2 decimal places.)

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a rate of 6%. The probability distribution of the risky funds is as follows:

The correlation between the fund returns is 0.13.

You require that your portfolio yield an expected return of 11%, and that it be efficient, on the best feasible CAL.

a. What is the standard deviation of your portfolio? (Round your answer to 2 decimal places.)

standard deviation _______%

b. What is the proportion invested in the T-bill fund and each of the two risky funds? (Round your answers to 2 decimal places.)

T-BILL _______

STOCKS_______

BONDS _______

1. XYZ Company had $50 million in owners’ equity at the start of 2017. A million shares were outstanding then, with a price at 20% premium to book value (i.e., market value-per-share is 20% above book value-per-share). What were its market value and book value; market value-per-share and book value-per-share?

2. XYZ earned $10 million in (after-tax) profits during 2017. What was its ROE and earnings-per-share (eps)?

3. XYZ retained $5 million of its 2017 earnings. Suppose the company makes the same profits in 2018. What are the new ROE and eps? Can you explain the different behaviors of these two measures relative to 2017?

5. Return to the start of 2018, given the 2017 retained earnings as stated in question 3. What were XYZ’s market value and book value; market value-per-share and book value-per-share on Jan 2 2018, assuming the same relationship (i.e., 20% premium) between market and book value-per-share as in question 1?

6. On Jan 3 2018 XYZ issues an additional 100,000 shares at a 2% discount to its Jan 2 price. What are its market and book values; market value-per-share and book value-per-share on that date?

Leann just sold a $10,000 par value bond for $9,800. The bond interest rate was 5.5% per year payable quarterly. Leann owned the bond for 3 years. The 1st interest payment she received was 3 months after she bought the bond. She sold it immediately after receiving her 12th interest payment. Leann’s yield on the bond was 11% per year compounded quarterly. Determine the price she paid when she purchased the bond.

Recording and Assessing the Effects of installment Loans: Semiannual Installments

On December 31,2015 Wasley Corporation borrowed $300,000 on a 6%, 10-year mortgage note payable. The note is to be repaid with equal semiannual installments, beginning June 30, 2016.

Required

a. Compute the amount of the semiannual installment payment using a financial calculator or Excel and round amount to the nearest dollar.

Ans.

b. Prepare the journal entry (1) to record Wasley's borrowing of funds on December 31,2015, (2) to record Wasley's installment payment on December 31, 2016.

c.Post the journal entries from part "b" to their respective T-acccounts (cash(A), mortgage note payable(L), interest expense(E).

d.Record each of the transactions from part "b" in the financial statement effects template.

Suppose that the borrowing rate that your client faces is 11%. Assume that the S&P 500 index has an expected return of 15% and standard deviation of 32%, that r_f = 3%.

What is the range of risk aversion for which a client will neither borrow nor lend, that is, for which y = 1? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Required Lump-Sum Payment

To complete your last year in business school and then go through law school, you will need $20,000 per year for 4 years, starting next year (that is, you will need to withdraw the first $20,000 one year from today). Your uncle offers to put you through school, and he will deposit in a bank paying 8.61% interest a sum of money that is sufficient to provide the 4 payments of $20,000 each. His deposit will be made today.

1. How large must the deposit be? Round your answer to the nearest cent.
   $  
   
2. How much will be in the account immediately after you make the first withdrawal? Round your answer to the nearest cent.
   $  
   
   How much will be in the account immediately after you make the last withdrawal? Round your answer to the nearest cent. Enter "0" if required
   $  

You have the following data on The Home Depot, Inc. Market value of long-term debt: $20,888 million Market value of common stock: $171,138 million Beta: 1.04 Yield to maturity on debt with 10 years to maturity: 2.167% Expected return on equity: 8.512% Marginal tax rate: 35% Assume that if Home Depot issues new bonds, the bonds will have 10 years to maturity. Suppose that managers at Home Depot decide to increase the proportion of debt to 20% of the value of the company. The managers estimate that yield on the company’s 10 year bonds will rise to 2.432% if the company changes its capital structure in this manner. What would be the expected rate of return on equity under the new capital structure? Do not round at intermediate steps in your calculation. Express your answer in percent. Round to two decimal places. Do not type the % symbol.

X denotes the field that needs to be answered.

You’ve collected the following information from your favorite financial website.

52-Week Price Stock (Cur div)

Hi Lo Div Yld % PE Ratio Close Price Net Chg

77.40 10.43 Palm Coal .36 2.6 6 13.90 –.24

55.81 33.42 Lake Lead Grp 1.54 3.8 10 40.43 –.01

130.95 69.60 SIR 2.10 2.4 10 88.99 3.07

50.24 13.95 DR Dime .80 5.2 6 15.43 –.26

35.00 20.74 Candy Galore .32 1.5 28 ?? .18

According to your research, the growth rate in dividends for SIR for the next five years is expected to be 20.5 percent. Suppose SIR meets this growth rate in dividends for the next five years and then the dividend growth rate falls to 5.5 percent indefinitely. Assume investors require a return of 13 percent on SIR stock.

According to the dividend growth model, what should the stock price be today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Current stock price $

You’ve collected the following information from your favorite financial website.

Using the dividend yield, calculate the closing price for Candy Galore on this day. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
Stock price            $

Assume the actual closing price for Candy Galore was $21.69. Your research projects a 4.25 percent dividend growth rate for Candy Galore. What is the required return for the stock using the dividend discount model and the actual stock price? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Required return             %