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Question;Exam 3 Name;1.;Which of the following statements is correct?;a.;If;companies have fewer good investment opportunities, interest rates are likely;to increase.;b.;If;individuals increase their savings rate, interest rates are likely to increase.;c.;If;expected inflation increases, interest rates are likely to increase.;d.;Interest;rates on all debt securities tend to rise during recessions because recessions;increase the possibility of bankruptcy, hence the riskiness of all debt;securities.;2. If 10 ? year T-bonds have a yield of;6.3%, 10 ? year corporate bonds yield 7.7%, and corporate bonds have a 0.2%;liquidity premium versus a zero liquidity premium for t-bonds, what is the;default risk premium on the corporate bond?;3. The McCurry Company's bonds mature in;12 years have a par value of $1,000 and an annual coupon payment of $90. The market interest rate for the bonds is;12%. What is the price of these bonds?;4. John Jacob Inc's bonds currently sell;for $1,250 and have a par value of $1,000.;They pay an $80 annual coupon and have a 25-year maturity, but they can;be called in 10 years at $1,100. What is;their yield to maturity (YTM)?;5.;Stickle Inc's bonds currently sell for $1,275 and have a par value of;$1,000. They pay an $80 annual coupon;and have a 20-year maturity, but they can be called in 5 years at $1,080. What is their yield to call (YTC)?;6. A stock just;paid a dividend of $1.25. The;required rate of return is rs = 14%, and the constant growth rate is;7%. What is the current stock price?;7. Johnny Walker;Inc plans to issue preferred stock with a perpetual annual dividend of $1.10;per share and a par value of $15. If the;required return on this stock is currently 10%, what should be the stock?s;market value?;8. If D1;= $2.00, g (which is constant) = 6%, and P0 = $70, what is the;stock?s expected total return for the coming year?;9. The Parker Alan;Company's last dividend was $1.20. Its;dividend growth rate is expected to be constant at 20% for 3 years, after which;dividends are expected to grow at a rate of 8% forever. Connors? required return (rs) is;12%. What is Connors? current stock;price?;10. If a stock?s;expected return exceeds its required return, this suggests that;a.;The stock should be sold.;b.;The company is probably not trying to maximize price per;share.;c.;The stock is probably a good buy.;d.;Dividends are not being declared.;Question 11-20;I;recommend using an excel spreadsheet and first calculate your cash flows over;the life time of the Death Star. In;addition, you don?t need the CAPM, but simply calculation the return for the;stock based upon the information. Each;section is worth five points. I will be here early next week for;questions and can work together to finish this question, just attempt to finish;as much as possible, or at least have the problem mapped out. In addition, I can entertain some email;questions if necessary. Good luck!;The Empire is planning;to create the first ever Death Star. Darth Vader, the Emperor?s right hand man;and the manager of the project, has asked you to evaluate the project. Here is;some of the information that you will need to evaluate the project. The;equipment would cost around IC 100,000 (where IC is the imperial credit) plus;IC 60,000 more for installation. In order to operate the Death Star, working;capital has to increase by IC 40,000 which will be recovered at the end of the;project. As the Emperor has foreseen it, the project is expected to last 4;years after which the equipment will be destroyed by the Rebellion. However;some parts of the project will be salvaged and sold for IC 20,000 to the Ewoks.;Depreciation will be based on straight-line method with zero salvaged value.;Each planet that Darth Vader destroys will cost the empire IC 10,000 but at the;same time it will bring in IC 25,000 per planet destroyed from other fearing;planets. Each year the empire plans to destroy 10 planets. The Death Star is a;big-machine and therefore will incur a fixed cost of IC 75,000 to operate each;year. In order to set an example, the Empire Department of Tax will charge a;40% tax rate on the Death Star, however they will give tax shield for borrowing;money.;To finance this;project, the Empire will borrow 40% of the initial outlay from the Banking Clan;at a pre-tax rate of 12.50%. The other 60% will come by selling equity to the;Separatist Group. The selling price per share of the Empire is IC 100 and is;expected to grow at the constant rate of 11.67% forever. The next dividend will;be of IC 5. The lenders of the capital require high rate of return because this;is a risky project and has never been done before.;What is your;recommendation of the Death Star project to Darth Vader? Show your work. If you;believe that you cannot do this analysis, Darth Vader has given you the following;warning: ?I find your lack of faith disturbing.?;11. What is the initial;outlay for the project? (Hint: Add;increase in working capital.);12. What is the per;year depreciation expense? (Hint: Do not;count the NOWC.);13. What is the;after-tax salvage value of the equipment? (Hint;Remember that the book value of the equipment at the end of the project is;zero.);14. What are the cash;flows for all 4 years? (Hint: Cash flows;for year 1, 2, and 3 will be same. For the fourth year, add the NOWC and;after-tax salvage value of the equipment.);15. What is the after;tax cost of debt?;16. What is the cost of;equity? (Hint: See directions for hint.);17. Given the financing;need of the Empire, what is WACC?;18. Based on WACC, what;is the NPV of the project?;19. What is the IRR of;the project?;20. What is your;recommendation to Darth Vader? (Remember Darth Vader doesn?t like simple;answer, you need to provide proper explanation)

 

Paper#48911 | Written in 18-Jul-2015

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