Reference no: EM132506560

Question 1. Complex Systems has an outstanding issue of $1,000-parvalue bonds with a 12% coupon interest rate. The issue pays interest annually and has 16 years remaining to its maturity date.

a. If bonds of similar risk are currently earning a 10% rate of return, how much should the Complex Systems bond sell for today?

b. Describe the two possible reasons why the rate on similar-risk bonds is below the coupon interest rate on the Complex Systems bond.

c. If the required return were at 12% instead of 10%, what would the current value of Complex Systems' bond be? Contrast this finding with your findings in part a and discuss.

Question 2. The Salem Company bond currently sells for $955, has a 12% coupon interest rate and a $1,000 par value, pays interest annually, and has 15 years to maturity.

a. Calculate the yield to maturity (YTM) on this bond.

b. Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond.

Question 3. Scotto Manufacturing is a mature firm in the machine tool component industry. The firm's most recent common stock dividend was $2.40 per share. Because of its maturity as well as its stable sales and earnings, the firm's management feels that dividends will remain at the current level for the foreseeable future.

a. If the required return is 12%, what will be the value of Scotto's common stock?

b. If the firm's risk as perceived by market participants suddenly increases, causing the required return to rise to 20%, what will be the common stock value?

c. Judging on the basis of your findings in parts a and b, what impact does risk have on value? Explain.

Question 4. McCracken Roofing, Inc., common stock paid a dividend of $1.20 per share last year. The company expects earnings and dividends to grow at a rate of 5% per year for the foreseeable future.

a. What required rate of return for this stock would result in a price per share of $28?

b. If McCracken expects both earnings and dividends to grow at an annual rate of 10%, what required rate of return would result in a price per share of $28?

Question 5. Assuming that the rates of return associated with a given asset investment are normally distributed; that the expected return, is 18.9%; and that the coefficient of variation, CV, is 0.75; answer the following questions:

a. Find the standard deviation of returns, r.

b. Calculate the range of expected return outcomes associated with the following probabilities of occurrence: (1) 68%, (2) 95%, (3) 99%.1. Complex Systems has an outstanding issue of $1,000-parvalue bonds with a 12% coupon interest rate. The issue pays interest annually and has 16 years remaining to its maturity date.