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Problem Set 1-4




Question;Problem Set-1;1. Suppose;a bank offers to lend you $10,000 for 1 year on a loan contract that calls for;you to make interest payments of $250.00 at the end of each quarter and;then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?;2. Your;sister turned 35 today, and she is planning to save $7,000 per year for;retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that's;expected to provide a return of 7.5% per year.;She plans to retire 30 years from today, when she turns 65, and she;expects to live for 25 years after retirement, to age 90. Her first withdrawal will be made at the end;of her first retirement year. Under these assumptions, how much can she spend;each year after she retires?;3. Suppose;you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal;installments at the end of each of the next 5 years. How much would you still owe at the end of;the first year, that is, after you have made the first payment?;4. You;want to go to Europe 5 years from now, and you can save $3,100 per year;beginning one year from today. You plan;to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you;have 5 years from now?;5. Bank;A pays 4% interest compounded annually while bank B pays 3.5% compounded daily.;Which bank would you choose to deposit your money and why?Problem Set-2;1. O'Brien;Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25;years. Their nominal yield to maturity;is 9.25%, they pay interest semiannually, and they sell at a price of;$975. What is the bond's nominal coupon;interest rate?;2. The;Pennington Corporation issued bonds on January 1, 1987. The bonds were sold at;par, had 12% annual coupon, paid semi-annually, and mature on December 31;2016.;a) What;was the Yield-to-Maturity (YTM) on the date the bonds were issued?;b) What;was the price on January 1, 1992, assuming interest rates have fallen to 10%?;c) Find;the current yield, capital gains/losses yield and total yield on January 1;1992?;3.;McCue;Inc.'s bonds currently sell for $1,250.;They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par;value, but they can be called in 5 years at $1,050. What is the bond's Yield to Maturity and its Yield;to Call?;4.;Cosmic;Communications Inc. is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par;value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount;bond, and it will also have a 25-year maturity and a $1,000 par value, but its;semiannual coupon will be only 6.25%. If;both bonds are to provide investors with the same effective yield, how many of;the OID bonds must Cosmic issue to raise $3,000,000?;5.;A;25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its;current rate, what will the price be 5 years from now?Problem Set-3;1. A;mutual fund manager has a $40 million portfolio with a beta of 1.00. The risk-free rate is 4.25%, and the market;risk premium is 6.00%. The manager;expects to receive an additional $60 million which she plans to invest in;additional stocks. After investing the;additional funds, she wants the combined;fund?s required return to be 13.00%.;What must the average beta of the new stocks be to achieve the required;rate of return of 13%?;2. Stock;A has a beta of 1.30, and its required return is 12.00%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the;required rate of return on stock B?;3. Suppose;you have a diversified portfolio consisting of $10,000 investment in each of 10;different stocks. The portfolio?s beta is 1.12. You are considering selling;$10,000 worth of one stock with a beta of 1.0 and using the proceeds to buy;another stock with a beta of 1.14. What is the new beta of portfolio after;these transactions?;4. Assume;that you manage a $10 million mutual fund that has a beta of 1.05 and a 9.50%;required return. The risk-free rate is;4.20%. You now receive another $5;million, which you invest in stocks with an average beta of 0.65. What is the required rate of return on the combined;$15million portfolio?;5. Stock;A, an average stock, has an expected return of 10 percent. Stock B has a beta;of 2.0. Portfolio P is a two-stock;portfolio, where part of the portfolio is invested in Stock A and the other;part is invested in Stock B. Assume that;the risk-free rate is 5%. Portfolio P;has an expected return of 12 percent.;What proportion of Portfolio P consists of Stock B?Problem Set-4;1. Ewald;Company?s current stock price is $36 and its last dividend was $2.40. The;required rate of return is 12%. If dividends are expected to grow at a constant;rate g;in the future, what is Ewald?s stock price 5;years from now?;2. Martell;mining company?s ore reserves are being depleted, so its sales are falling.;Also, because its pit is getting deeper each year, its costs are rising. As a;result, the company?s earnings and dividends are declining at the constant rate;of 5% year. If D0=$5 and K i.e. Rs =15%, what;is the value of Martell mining?s stock?;3. The;Price of Consolidated inc. is now 75. The company pays no dividends. Ms. B;expects the price three years from now to be $100 per share. Should Ms. B buy;Consolidated stock if she requires a 10% rate of return?


Paper#48158 | Written in 18-Jul-2015

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