Question;Assignment 3;Instructions;Assignment 3 should be submitted after you;have completed Unit 5. This assignment is worth;15 percent of your final grade.;Assignment 3 contains eight problems. The;maximum mark for each problem is noted at the beginning of the problem. This;assignment has a total of 100 marks.;Read the requirements for each problem and;plan your responses carefully. Although your responses should be concise;ensure that you answer each of the required components as completely as;possible. If supporting calculations are required, present them in good form.;When you receive your graded assignment;carefully review the comments the marker has made. This review component is an;important step in your learning process. If you have any questions or concerns;about the evaluation, please contact the Student Support Centre.;Problem 1 (10 marks);Three years ago, you;purchased a bond for $974.69. The bond had three years to maturity, a coupon;rate of 8% paid annually, and a face value of $1,000. Each year you reinvested;all coupon interest at the prevailing reinvestment rate shown in the table;below. Today is the bond's maturity date. What is your realized compound yield;on the bond?;Time;Prevailing reinvestment rate;0 (purchase date);6.0%;1;7.2%;2;9.4%;3 (maturity date);Problem 2 (15 marks);You will be paying;$10,000 a year in education expenses at the end of the next two years.;Currently the yield curve is flat at 8%.;If you want to fully fund and immunize your obligation with a;single issue of a zero-coupon bond, what maturity bond must you purchase?;What must be the market value and the face value of the;zero-coupon bond?;Instead of using a single zero-coupon bond, you prefer to use a;one-year T-Bill and a five-year zero-coupon bond to fund and immunize your;obligation. How much of each security will you buy?;Problem 3 (15 marks);A;newly issued bond has the following characteristics;Par value = $1000;Coupon rate = 8%;Yield to Maturity = 8%;Time to maturity = 15 years;Duration = 10 years;Calculate modified;duration using the information above.;If the yield to;maturity increases to 8.5%, what will be the change (in dollar amount) in;bond price?;Identify the;direction of change in modified duration if;i. the coupon of the bond is 4%;not 8%.;ii. the maturity of the bond is 7;years, not 15 years.;How can you;construct a portfolio with a duration of 8 years using this bond and a 5;year zero coupon bond?;Problem 4 (10 marks);You have been provided with the following;information zero coupon bonds with $1000 face value.;Maturity - semi -annual periods;semi-annual spot rates;1;4.25;2;4.15;3;3.95;4;3.70;5;3.50;6;3.25;7;3.05;8;2.90;Compute the forward interest rates.;Graph the yield curve.;Explain the factors that account for the shape of the curve.;Problem 5 (10 marks);Company HTA had a free;cash flow for the firm (FCFF) of $1,500,000 last year. It is expected the FCFF;will keep a sustainable growth rate of 5%. The company has 2 million common;shares outstanding. In addition, the following information has been gathered;Capital structure: D/E=0.2:0.8?;Market value of Debt: VD =$5,000,000;Required return on equity: kE =15%;Cost of debt before tax =6%;Tax rate: tc =25%;Determine the fair;value of HTA stock.;Problem 6 (15 marks);Company;JUK has a ROE of 25% and the company will not pay any dividend for the next 3;years. It is estimated that the company will pay $2 dividend per share after;three years and then to level off to 5% per year forever.;The;company has a beta of 2. Assume the risk-free interest rate is 4%, and the;market risk premium is 8%.;What is your;estimate of the fair price of a share of the stock?;If the market price;of a share is equal to this intrinsic value, what is the P/E ratio?;What do you expect;its price to be 1 year from now? Is the implied capital gain consistent;with your estimate of the dividend yield and the market capitalization;rate?;Problem 7 (10 marks);MicroSense, Inc., paid;$2 dividends per share last year. It is estimated that the company?s ROEs will;be 12% and 10%, respectively, next two years. The plowback rate in next two;years will be 0.6. It is expected that the dividends will grow at a sustainable;rate of 3% per year after two years. Assume that the expected return on the;market is 8%, the risk-free rate is 4%, and the beta of the stock is 1.4. What;is the fair price of the stock?;Problem 8 (15 marks);An analyst uses the constant growth model;to evaluate a company with the following data for a company;Leverage ratio;(asset/equity): 1.8;Total asset;turnover: 1.5;Current ratio: 1.8;Net profit margin: 8%;Dividend payout;ratio: 40%;Earnings per share;in the past year: $0.85;The required;rate on equity: 15%;Based on an analysis, the growth rate of;the company will drop by 25 percent per year in the next two years and then keep;it afterward. Assume that the company;will keep its dividend policy unchanged.;Determine the growth rate of the company for each of next three;years.;Use the multi-period DDM to estimate the intrinsic value of the;company?s stock.;Suppose after one year, everything else will be unchanged but;the required rate on equity will decrease to 14%. What would be your;holding period return for the year?
Paper#47572 | Written in 18-Jul-2015Price : $37