Reference no: EM131749659

ASSIGNMENT

The purpose of this assignment is to solidify your understanding on the applications of the risk and return concepts and their role in valuing financial assets. The scores of this assignment will help in assessing the following learning goal of the course: "students successfully completing this course will be able to Analyze risk return characteristics to assess valuation of financial assets".

Instructions:

You are required to use a financial calculator or spreadsheet (Excel) to solve 10 problems (provided on page 3) related to the risk and return, stocks and bonds valuation. You are required to show the following 3 steps for each problem (sample questions and solutions are provided for guidance):

(i) Describe and interpret the assumptions related to the problem.
(ii) Apply the appropriate mathematical model to solve the problem.
(iii) Calculate the correct solution to the problem.

Problems

1. ABC Corporation issues a bond which has a coupon rate of 10.20%, a yield to maturity of 10.55%, a face value of $1,000, and a market price of $850. What is the annual interest payment?

2. A shipping company sold an issue of 12-year $1,000 par bonds to build new ships. The bonds pay 4.85% interest, semiannually. Today's required rate of return is 9.7%. How much should these bonds sell for today? Round off to the nearest $1.

3. Assume a company has an issue of 18-year $1,000 par value bonds that pay 7% interest, annually. Further assume that today's required rate of return on these bonds is 5%. How much would these bonds sell for today? Round off to the nearest $1.

4. ABC company issued bonds on January 1, 2006. The bonds had a coupon rate of 5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2021. What is the yield to maturity for these bonds on January 1, 2012 if the market price of the bond on that date is $950?

5. A $1,000 par value 14-year bond with a 10 percent coupon rate recently sold for $965. What is the yield to maturity?

6. Consider a 10 year bond with face value $1,000, pays 6% coupon semi-annually and has a yield-to-maturity of 7%. How much would the approximate percentage change in the price of bond if interest rate in the economy decreases by 0.80% per year?

7. ACME, Inc. expects its current annual $2.50 per share common stock dividend to remain the same for the foreseeable future. What is the value of the stock to an investor with a required return of 12%?

8. ABC Company's common stock is expected to pay a $2.00 dividend in the coming year. If investors require a 17% return and the growth rate in dividends is expected to be 8%, what will the market price of the stock be?

9. ABC Corporation stock is currently selling for $58.00. It is expected to pay a dividend of $5.00 at the end of the year. Dividends are expected to grow at a constant rate of 7.5% indefinitely. Compute the required rate of return on ABC Corporation stock.

10. XYZ Corp. paid a dividend today of $5 per share. The dividend is expected to grow at a constant rate of 6.5% per year. If XYZ Corp. stock is selling for $50.00 per share, what is the stockholders' expected rate of return?