Problem 1. Consider the following table, which gives a security analysts expected return on two stocks for two particular market returns:

a) What are the betas of the two stocks?

b) What is the expected rate of return on each stock if the market return is equally likely to be 5% or 25%?

c) If the T-bill rate is 6% and the market return is equally likely to be 5% or 25%, draw the SML for this economy.

d) Plot the two securities on the SML graph. What are the alphas of each?

Problem 2. Assume that the risk-free rate of interest is 6% and the expected rate of return on the market is 16%.

a) A share of stock sells for $50 today. It will pay a dividend of $6 per share at the end of the year. Its beta is 1.2. What do investors expect the stock to sell for at the end of the year?

b) A stock has an expected rate of return of 4%. What is its beta?

Combined Communications is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 24 percent a year for the next 4 years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount of $1.30 per share. What is the current value of one share of this stock if the required rate of return is 9.25 percent? can you please do it on excel

Calculate the modified duration of a 10-year 7% semi-annual coupon bond priced at 97.50. 7.316 7.06 6.88 3.53 3.67

Using the bond below, calculate your annual holding period yield (on a bond equivalent basis).

• 3.096%
• 5.888%
• 6.192%
• 6.246%
• 6.288%

(Note: I did my assignment with these answers but 4 of them is wrong and 6 are right. Please tell me which answer is wrong and what's the right answer for them)

1-One of the most important features of a filing and record keeping system is that it works for you and meets your needs.

(True)

2-Which one of these is the best way to prevent foreclosure?

Save at least 1% of your home’s purchase price annually

(ANSWER)-Refinance as soon as possible

Use a budget to live within your means and build savings

Never accept an adjustable-rate mortgage

3-Choose the best scenario for refinancing.

(ANSWER)-You have a current mortgage at 5% and have been approved for a new mortgage at 3.75%. You’ll break even on the closing costs in two years, and you don’t plan to move for at least five.

You intend to move in about nine months, but you have been approved for a mortgage with an interest rate two whole points lower than your current rate.

4-A home equity loan can be risky because the lender can foreclose if you don’t make your payments.

(TRUE)

5-The best way to protect your family from carbon monoxide poisoning is to install a whole-house air ventilation system.

(FALSE)

6-What should you do if you start having a hard time paying your mortgage? Select all that apply.

Use your credit cards for everything so you can meet your payment

Notify your mortgage servicer

Contact a Homeownership Advisor

Wait a few months and see if things turn around

Cut other expenses where you can

7-How much should you save each year for maintenance on your home?

$500

Whatever your home inspector recommends

7% of your gross income

(ANSWER) At least 1% of the purchase price

8-One of the advantages of a home equity loan is that you can borrow money any time, up to the approved amount.

(ANSWER) (TRUE)

9-Which of these is not a responsibility of homeownership?

(ANSWER)Being a courteous neighbor

Getting appraisals done annually

Keeping your home properly insured

Keeping your home safe and secure

Regular home maintenance

10-In which scenario do most homeowners use the equity in their home?

(ANSWER)To pay off student loans

When they have children

When they sell it to buy a new one

When they’re threatened with foreclosure

10-2. Chris contracts to sell his house and lot to Kahra for $250,000. The terms of the contract call for Hayaa to pay 20 percent of the purchase price as a deposit toward the purchase price, or as a down payment. The terms further stip¬ulate that should the buyer breach the contract, the deposit will be retained by Chris as liquidated damages. Kahra pays the deposit, but because her expected financing of the $190,000 balance falls through, she breaches the contract. After adjusting the listing price downward several times due to market volatility, 10 months later Chris sells the house and lot to Connor for $270,000. Kahra demands her $50,000 back, but Chris refuses, claiming that Kahra's breach and the contract terms entitle him to keep the deposit. Discuss who is correct using the IRAC method of case analysis.

You have the following financial statement data for a corporation: Revenue = 10,000,000

Operating income = 7,500,000 interest = 2,500,000

Net Income = 4,000,000 Current Assets = 10,000,000 Total Assets = 100,000,000 Current Liabilities = 8,000,000 Long-term Debt = 50,000,000

Total Common Equity = 42,000,000

You also have the following information: Total Dividends Paid = 1,000,000 Common shares outstanding = 2,000,000

Current share price = $27

The long-term debt consists of one bond issue that has 6 years remaining until maturity. Each bond has a par value of $1,000 and pays an annual coupon. The current yield-to-maturity on the bond issue is 8%.

The firm is considering a capital budgeting project that will require an initial outlay of $1,000,000 that is expected to produce net cash inflow of $200,000 each year for the next 7 years, at which time the project will end. The project under consideration is considered to be of equal risk as the firm's typical project. The firm has not made a decision as to how it will finance the project, if necessary. If it issues new equity to finance the project, it could sell new common equity at the current market price, while incurring total flotation cost of 5%.

The current risk-free rate of return for the market 2%, and the market risk-premium is estimated to stand at 7.5%. You know nothing about the firm's expected dividend policy, but you do know that the firm's equity Beta is 1.8

Based on the information you have, answer the following questions about the firm (You must show work for each question and answer each question separately in order to earn full credit):

1. What is the firm's profit margin?

2. Using the DuPont identity and the information given, show the value of the firm's equity multiplier?

3. What is the firm's P/E ratio?

4. What is the firm's current ratio?

5. What is the best estimate of the firm's capital structure according to book value?

6. What is the total market value of the firm's equity?

7. What is the total market value of the firm's debt?

8. What is the total value of the firm based on market value?

1. What is the firm's capital structure based on market values?

10. What is the firm's pre-tax cost of debt?

11. What is the best estimate for the firm's cost of common equity if using retained earnings as a financing option?
    50. What is the best estimate for the firm's WACC if using retained earnings as common equity financing?
    1000. What is the best estimate of the NPV for the proposed capital budgeting project, given the info that you have?
    14. Should the firm accept the project based on NPV analysis? Why or why not?

• • What is the IRR for the proposed project?

Imagine you are the treasurer of a Japanese company exporting electronic equipment to the United States. All revenues are received in USD and all other expenses (e.g., R&D costs, costs of employees etc) are incurred in Japanese Yen.

Required:

(i) Discuss whether you need to hedge the foreign exchange risk and factors you need to consider when designing contracts to hedge the risks.

(ii) If the company is able to raise the price of its product in USD if Yen appreciates without affecting the sales volume, how would you adjust your recommendation in part (i) and sell your strategy to other executives?

Hint: If the company is able to raise the price of its product in USD if Yen appreciates, what does it tell you about the company’s foreign exchange exposure? Which derivative security (securities) could be used to hedge this risk? There is no model answer to this question, you just have to provide reasoned explanations.

Consider the following projects, X and Y where the firm can only choose one. Project X costs $1500 and has cash flows of $678, $652, $347, $111, $54, $16 in each of the next 6 years. Project Y also costs $1500, and generates cash flows of $738, $693, $405 for the next 3 years, respectively. WACC=9.5%.

1. A) Draw the timelines for both projects: X and Y.

2. B) Calculate the projects’ NPVs, IRRs, payback periods.

3. C) If the two projects are independent, which project(s) should be chosen?

4. D) If the two projects are mutually exclusive, which projects should be chosen?

5. E) Plot NPV profiles for the two projects. Identify the projects’ IRRs on the graph.

6. F) If the WACC were 5.5 percent, would this change your recommendation if the projects were

   mutually exclusive? If the WACC were 16.5 percent, would this change your recommendation? Explain your answers.

7. G) There is a “crossover rate” of X’s and Y’s NPV curves, and mark it on the graph with Point O. Explain in words what this rate is and how it affects the choice between mutually exclusive projects.

8. H) If it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explain your answer.

This is my final paper! I just need a couple paragraphs for each!

1) When regressing Beta manually, you could use daily, weekly, and monthly stock data. Which do you recommend using? What things do you need to consider when making your choice of which time frame to use? What are the issues that can happen when using each of the 3 time frames?

2) When we discussed relative valuation we introduced the ratios P/E, P/S and P/B. Knowing that P/E is the most commonly used of the 3, why would someone choose to use P/S or P/B in valuation? Give as many situations as possible to illustrate your knowledge of relative valuation.

3) Explain the winner’s curse phenomenon and how it affects IPO pricing. Give an example with numbers if possible.

You believe that 6 months from now, the 12-month treasury spot rate will be 7%. You believe that 1 year from now, the 6-month treasury spot rate will be 6.00%. Given the treasury spot rates below, which of the following strategies would generate the highest return?

• Invest in an 18-month treasury.
• Invest in a 12-month treasury, at maturity reinvest proceeds in a 6-month treasury.
• Invest in a 6 month treasury, at maturity reinvest proceeds in a 12-month treasury.
• You are indifferent between all 3 strategies.

You believe that 6 months from now, the 12-month treasury spot rate will be 7.00%. You believe that 1 year from now, the 6-month treasury spot rate will be 6.00%. You believe that 18 months from now, the 6-month treasury spot rate will be 5%. Given the treasury spot rates below, which of the following strategies would generate the highest return?

• Invest in an 18-month treasury.
• Invest in a 12-month treasury, at maturity reinvest proceeds in a 6-month treasury.
• Invest in a 6 -month treasury, at maturity reinvest proceeds in a 12-month treasury.
• Invest in a 24-month treasury but sell 6-month prior to maturity.
• You are indifferent between all 3 strategies.

Compute the cost of not taking the following trade discounts: (Use 365 days in a year. Round the intermediate calculations to 4 decimal places. Round the final answer to 2 decimal places.)

a. 2/13, net 50.

Cost of lost discount             %

b. 2/20, net 50.

Cost of lost discount              %

c. 3/18, net 65.

Cost of lost discount             %

d. 3/18, net 150.

Cost of lost discount             %