Question

1. You buy a bond with a par value of $1000 and a coupon rate of 8% with 18 coupons remaining. You hold the bond and receive 11 coupons. If the bond had a YTM of 8.2% when you bought it and 9.1% when you sold it, what was your annual holding period ROR?

2. A company’s dividends will be as follows: Year 1= 2.25, Year 2= $2.80, long-term growth rateafter year 2= 5.5%. If the market risk free rate is 5%, the market risk premium is 4%, and the company’s beta is 1.2, what is the intrinsic value of the firm’s stock?

3. Assume Firm A is expected to pay a dividend of $3.40 one year from today. Dividend growth is projected to be 5% and its stock price is $45. What is Firm A’s estimated cost of equity according to the dividend growth model?

4. Your company is considering a project that will cost $1 million. The project will generate after-tax cash flows of $250,000 per year for 7 years. The WACC is 14%, and the firm’s target D/E ratio is .5. The flotation cost for equity is 6%, and the flotation cost for debt is 3%. What is the NPV for the project after adjusting for flotation costs?

Answer 1