Reference no: EM132904622

Question 1 - A Bond has a modified duration of 5.7 and trades for $954. Average daily yield change standard deviation is 0.2% and expected daily yield change is 0.05%. What is the one month 5% VaR for the Bond using delta-normal approach? Assume 20 trading days in a month and provide $ answer.

Question 2 - You are investing in a bond and stock portfolio. In order to estimate Var for the portfolio, you decide to map portfolio returns into two fund returns. The expected returns for bond is 6.3% and stock funds are 9.1%. The standard deviations are 17% for stock fund and 8.6% for bond fund. The correlation coefficient between the two is -5%. What is annual 1% VaR for the portfolio if the portfolio invests 50% in the stock fund and 50% in the bond fund?

Question 3 - Rollins Corporation is estimating its WACC. Its target capital structure is 20% debt, 20% preferred stock, and 60% common equity. Its bonds have a 12% coupon, paid semi-annually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock which pays a 12% annual dividend, but flotation costs of 5% would be incurred. Rollins' beta is 1.2, the risk-free rate is 10%, and the market risk premium is 5%. Rollins is a constant-growth firm which just paid a dividend of $2.00, sell for $27.00 per share, and has a growth rate of 8%.

The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to find rs. The firm's marginal tax rate is 40 percent.

-What is Rollins' component cost of debt?

-What is Rollins' cost of preferred stock?            

-What is Rollins' cost of common stock (rs) using the CAPM approach?

-What is the firm's cost of common stock (rs) using the DCF approach?

-What is Rollins' cost of common stock using the bond-yield-plus-risk-premium approach?

-What is Rollins' WACC?