FIN 571 Week 2 DQ + Test;1. Does the market adjust for risk? How? Is the adjustment timely enough?;2. Some people say the P/E ratio may not be a reliable indicator of a stock?s expected future performance. Why is that?;3. Is the stock valuation model a useful tool? Why or why not?;4. What is the Capital Asset Pricing Model? How can it be used to calculate a businesses required return? Is it useful or too theoretical?;Note: Do not cut and past your reply from the internet or the text or you will not receive credit. I am interested in your own opinion.;Week Two Text Problems;FIN 571;Week Two Text Problems;A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond?s coupon rate is 7.4%. What is the fair value of this bond?;A10. (Dividend discou nt model) Assume RHM is expected to pay a total cash dividend of $5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%?;A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The preferred dividend is non-growing. What is the required return on James River preferred stock?;A14. (Stock valuation) Suppose Toyota has non-maturing (perpetual) preferred stock outstanding that pays a $1.00 quarterly dividend and has a required return of 12% APR (3% per quarter).;What is the stock worth?;B16. (Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose PhilEl?s bonds have identical coupon rates of 9.125% but that one issue matures in 1 year, one in 7 years, and the third in 15 years. Assume that a coupon payment was made yesterday.;a. If the yield to maturity for all three bonds is 8%, what is the fair price of each bond?;b. Suppose that the yield to maturity for all of these bonds changed instantaneously to 7%.;What is the fair price of each bond now?;c. Suppose that the yield to maturity for all of these bonds changed instantaneously again, this time to 9%. Now what is the fair price of each bond?;d. Based on the fair prices at the various yields to maturity, is interest-rate risk the same;higher, or lower for longer- versus shorter-maturity bonds?;B18. (Default risk) You buy a very risky bond that promises a 9.5% coupon and return of the;$1,000 principal in 10 years. You pay only $500 for the bond.;a. You receive the coupon payments for three years and the bond defaults. After liquidating;the firm, the bondholders receive a distribution of $150 per bond at the end of 3.5;years. What is the realized return on your investment?;b. The firm does far better than expected and bondholders receive all of the promised;interest and principal payments. What is the realized return on your investment?;B20. (Constant growth model) Medtrans is a profitable firm that is not paying a dividend on its common stock. James Weber, an analyst for A. G. Edwards, believes that Medtrans will begin paying a $1.00 per share dividend in two years and that the dividend will increase 6% annually thereafter. Bret Kimes, one of James? colleagues at the same firm, is less optimistic. Bret thinks that Medtrans will begin paying a dividend in four years, that the dividend will be $1.00, and that it will grow at 4% annually. James and Bret agree that the required return for Medtrans is 13%.;a. What value would James estimate for this firm?;b. What value would Bret assign to the Medtrans stock?;Ch. 7: Problem C1 (p. 184);C1. (Beta and required return) The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here.;a. Calculate the expected returns on the stock market and on Chicago Gear stock.;b. What is Chicago Gear?s beta?;c. What is Chicago Gear?s required return according to the CAPM?
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