1: Exam review
HW 9, #1
Given that Millcom International Cellular was up by over 1,200 percent for 2003, why didn't all investors hold Millcom International Cellular?
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HW 9, #2
We have seen that, over long periods of time, stock investments have tended to substantially outperform bond investments. However, it is not at all uncommon to observe investors with long horizons holding entirely bonds. Are such investors irrational?
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HW 9, #3
Suppose a stock had an initial price of $64 per share, paid a dividend of $1.75 per share during the year, and had an ending share price of $72. Compute the percentage total return.
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HW 9, #4
Suppose you bought a 9 percent coupon bond one year ago for $1,050. The bond sells for $1,080 today. (a) Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?
(b) What was your total nominal rate of return on this investment over the past year?
(c) If the inflation rate last year was 4 percent, what was your total real rate of return on this investment?
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Holding period returns -- bonds
Suppose you buy a bond that has a face value of $1000, 10 years left to maturity, pays an annual coupon of $90, and the yield to maturity is 8%. What is the market price of the bond?
What is the coupon yield?
What is the coupon rate?
After one year, if the YTM is 7.5%, what is your total holding period return?
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HW 8, #1
The Jackson-Timberlake Wardrobe Co., just paid a dividend of $1.40 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year, indefinitely. If investors require a 12 percent return on The Jackson-Timberlake Wardrobe Co., stock, what is the current price?
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HW 8, #2
Ayden, Inc., has an issue of preferred stock outstanding that pays an $8.25 dividend every year, in perpetuity. If this issue currently sells for $113 per share, what is the required return?
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Callable preferred stock
Continuing the previous example, suppose the stock were callable in four years for $100. How much would an investor be willing to pay for a share if he wanted to earn the same return? Why is the stock worth less it if includes the call option?
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HW 8, #3
Rizzi Co. is growing quickly. Dividends are expected to grow at a 25 percent rate for the next three years, with the growth rate falling off to a constant 7 percent thereafter. If the required return is 13 percent and the company just paid a $2.80 dividend, what is the current share price?
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DGM
ABC Corp. is currently paying no dividend and does not plan to pay any in the immediate future. In 4 years, ABC expects to begin paying a quarerly dividend. The first dividend is expected to be $.34. If the dividend is expected to grow at an annual rate of 9% forever, and investors require an expected return of 14% in order to hold ABC stock, what is the value of a share of ABC stock today?
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Bonds -- clean vs dirty price
Suppose the quoted (clean) price of a bond is $1038, and that the bond pays a $35 coupon semiannually (7% coupon rate). Suppose that there are 182 days between the last coupon payment and the next, that 42 days have elapsed in this period at time of purchase, and that accrued interest is calculated based on actual days (the convention for Treasury bonds). What is the invoice (dirty) price of the bond?
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Planning
ABC Corp. is doing some long-term planning. 2006 financial statements are on the following slide. Suppose that ABC wishes to maintain a dividend payout rate of 40%. Asset requirements (fixed and current), costs, and taxes increase in proportion to sales. Current liabilities will remain at the current level. ABC does not wish to issue any new equity.
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2006 Balance Sheet Current assets Fixed assets Total assets 1200 2000 3200
Current liabilities Long-term debt Equity Total L&E
800 1400 1000 3200
Sales Costs EBIT Tax NI
2006 Income statement 800 625 175 61.25 113.75
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How fast can ABC grow if they do not wish to issue any new debt?
How fast can ABC grow while maintaining the same debt-equity ratio?
What is the EFN if ABC wishes to attain a 15% sales growth target?
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Suppose that ABC is currently using only 90% of fixed assets. What is the EFN to achieve a 15% sales target if we assume 100% capacity utilization for 2007?
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