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MBA570_Homework_4

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Question;Instructions: Either type or;write your answers directly on this document and submit the completed;assignment to your ESO. Show your work;for the calculations. If you use additional documents for the calculations;label them with your name and course number (MBA 570) and submit them as well.;Each question is worth 10 points.;1.;A;5-year bond with a face value of $1,000 has a coupon rate of 10.50%, with;semi-annual payments.;a.;The;coupon payment for this bond is $__________. (Round to two decimal places.);b.;Look;at the timeline below and fill in the correct cash flows for the timeline;(note: periods are in six-month intervals).;Period 0 1 2 9;10;Cash flow CF1 CF2 CF9 CF10;Compute;the following cash flows. (Round to two;decimal places.);CF1;is $__________.;CF2;is $__________.;CF9;is $__________.;CF10;is $__________.;2.;The;following table summarizes prices of various default free zero coupon bonds;(expressed as a percentage of face value);Maturity (years);1;2;3;4;5;Price (per $100 face value);$96.22;$91.69;$87.15;$82.46;$77.33;a.;Compute;the yield to maturity for each bond.;Yield on the 1-year bond is __________% (Round;to two decimal places.);Yield on the 2-year bond is __________% (Round to two decimal places.);Yield on the 3-year bond is __________% (Round to two decimal places.);Yield on the 4-year bond is __________% (Round to two decimal places.);Yield on the 5-year bond is __________% (Round to two decimal places.);b.;Is;the following graph showing the zero-coupon yield curve? (Enter yes or no.);7;6.5;6;5.5;5;4.5;4;3.5;3;2.5;0 1;2;3;4 5;c.;The;above yield curve is;A. upward sloping.;B. downward sloping.;C. flat.;3.;Suppose;a 10-year, $1,000 bond with a 7% coupon rate and semiannual coupons is trading;for a price of $1,180.46.;a.;The;bond?s yield to maturity (expressed as an APR with semiannual compounding is __________%.;(Round to two decimal places.);b.;If;the bond?s yield to maturity changes to 8% APR, the price of the bond would be;$__________. (Round to nearest cent.);4.;Assume;the zero-coupon yields on default-free securities are as summarized in the;following table;Maturity;1 year;2 years;3 years;4 years;5 years;Zero-coupon yields;5.50%;6.00%;6.60%;6.80%;7.00%;a.;The;price of a three-year, default-free security with a face value of $1,000 and an;annual coupon rate of 7% is $__________. (Round;to two decimal places.);b.;The;yield to maturity for this bond is __________%. (Round to two decimal places.);5.;The;following table summarizes yields to maturity on several 1-year, zero-coupon;securities;Security;Yield;Treasury;2.94%;AAA Corporate;3.42%;BBB Corporate;3.69%;B Corporate;4.26%;a.;The;price (expressed as a percentage of the face value) of a 1-year, zero-coupon;corporate bond with a AAA rating and a face value of $1,000 is $__________. (Round to the nearest cent.);b.;The;credit spread on AAA-rated corporate bonds is __________%. (Round to two decimal places.);c.;The;credit spread on B-rated corporate bonds is __________%. (Round to two decimal places.);d.;How;does the credit spread change with the bond rating? Why?;A.;The;credit spread decreases as the bond rating increases, because lower rated bonds;are riskier.;B.;The;credit spread increases as the bond rating falls, because lower rated bonds are;riskier.;C.;The;credit spread decreases as the bond rating falls, because lower rated bonds are;riskier.;D.;The;credit spread increases as the bond rating increases, because higher rated;bonds are riskier.;6.;Anle;Corporation has a current price of $22, is expected to pay a dividend of $1 in;one year, and its expected price right after paying that dividend is $27.;a.;Anle?s;expected dividend yield is __________%. (Round;to two decimal places.);b.;Anle?s;expected capital gain rate is __________%. (Round;to two decimal places.);c.;Anle?s;cost of capital is __________%. (Round to;two decimal places.);7.;Summit;Systems will pay a dividend of $1.62 this year. If you expect Summit?s dividend;to grow by 6.6% per year, and its equity cost of capital is 11.7%, its price;per share is $__________. (Round to the;nearest cent.);8.;Heavy;Metal Corporation is expected to generate the following cash flows over the;next five years;Year;1;2;3;4;5;FCF ($ million);51.3;66.5;79.9;73.1;83.3;After that, the free cash flows are expected to grow at the industry average of;4.2% per year. Using the discounted free cash flow model and a weighted average;cost of capital of 14.8%;a.;The;enterprise value will be $__________ million. (Round to two decimal places.);b.;If;Heavy Metal has no excess cash, debt of $297 million, and 36 shares outstanding;its stock price per share will be $__________. (Round to two decimal places.);9.;You;read in the paper that Summit Systems will pay a dividend of $1.00 this year.;At that point you expect Summit?s dividend to grow by 5.5% per year. Today you;read in the paper that Summit Systems has revised its growth prospects and;expects its dividends to grow at a rate of 4.0% per year forever. If the firm?s;equity cost of capital is 10.0%;a.;The;value of a share of Summit Systems stock based on the original expected dividend;growth of 5.5% per year is $__________. (Round;to the nearest cent.);b.;If;you tried to sell your Summit Systems stock after reading this news, the price;you would likely get for a share is $__________. (Round to the nearest cent.);Why;is this so?;A.;You;would receive $22.22 if you act very quickly because it takes a day or two to;incorporate the information about the new growth rate.;B.;You;would receive $16.67 because markets are efficient and would incorporate the;information about the new growth rate immediately.;C.;You;would receive $22.22 because when you bought the stock, the dividend growth;rate was still 5.5%.;D.;You;would receive a price between $16.67 and $22.22 because you should get a blend;of the old and new dividend growth rates.;10.;In;early 2009, Coca-Cola Company had a share price of $43.24. Its dividend was;$1.24, and you expect Coca-Cola to raise this dividend by approximately 6.7%;per year in perpetuity.Note: For simplicity, assume that all;dividends are paid at the end of the year.;a.;If;Coca-Cola?s equity cost of capital is 8.2%, based on your estimate of the;dividend growth rate, the price per share you would expect would be $__________.;(Round to the nearest cent.);b.;Given;Coca-Cola?s share price, you would conclude that its future dividend growth;rate should be __________%. (Round to one decimal place.)

 

Paper#48069 | Written in 18-Jul-2015

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