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Remaining: Time 1. A fixed-income analyst has made the following assessments: (1) The real risk-free rate is expected to remain at 2.5 percent for the next ten years. (2) Inflation is expected to be 3 percent this year, 4 percent next year, and 5 percent a year thereafter. (3) The maturity risk premium is 0.1%(t - 1), where t = the maturity of the bond (in years). A five-year corporate bond currently yields 8.5 percent. What will be the yield on the bond, one year from now, if the above assessments are correct, and the bonds default premium and liquidity premium remain unchanged? (Points: 10) 2. You read in The Wall Street Journal that 30-day T-bills are currently yielding 8 percent. Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums: Inflation premium Liquidity premium Maturity risk premium Default risk premium 5% 1% 2% 2% Based on these data, the real risk-free rate of return is (Points: 10) 3. A financial planner has offered you three possible options for receiving cash flows. You must choose the option that has the highest present value. (1) $1,000 now and another $1,000 at the beginning of each of the 11 subsequent months during the remainder of the year, to be deposited in an account paying a 12 percent nominal annual rate, but compounded monthly (to be left on deposit for the year). (2) $12,750 at the end of the year (assume a 12 percent nominal interest rate with semiannual compounding). (3) A payment scheme of 8 quarterly payments made over the next two years. The first payment of $800 is to be made at the end of the current quarter. Payments will increase by 20 percent each quarter. The money is to be deposited in an account paying a 12 percent nominal annual rate, but compounded quarterly (to be left on deposit for the entire 2-year period). Which one would you choose? (Points: 10) 4. You borrow $100,000. You make annual payments (at the end of the year)for 5 years. The interest rate is 10%. How much interest do you pay in year 2? (Points: 5) 5. Your corporation has the following cash flows: Operating income Interest received Interest paid Dividends received Dividends paid $250,000 10,000 45,000 20,000 50,000 If the applicable income tax rate is 40 percent (federal and state combined), and if 70 percent of dividends received are exempt from taxes, what is the corporation's tax liability? (Points: 10) 6. A company has the following income statement. profit after taxes (NOPAT)? Sales Costs Depreciation EBIT Interest expense EBT Taxes (40%) Net income $ $ $ $1,000 600 250 150 50 100 40 60 What is its net operating (Points: 5) 7. You hold a diversified portfolio consisting of a $10,000 investment in each of 20 different common stocks (i.e., your total investment is $200,000). The portfolio beta is equal to 1.2. You have decided to sell one of your stocks which has a beta equal to 0.7 for $10,000. You plan to use the proceeds to purchase stock another which has a beta equal to 1.4. What will be the beta of the new portfolio? (Points: 10) 8. You are holding a stock which is currently in equilibrium. The required rate of return on the stock is 15 percent when the required return on an average stock is 10 percent. What will be the percentage change in the required return on the stock if the required return on an average stock increases by 30 percent while the risk-free rate is unchanged? Your stock has a beta of 2. (Points: 10) 9. Marie Snell recently inherited some bonds (face value $100,000) from her father, and soon thereafter she became engaged to Sam Spade, a University of Florida marketing graduate. Sam wants Marie to cash in the bonds so the two of them can use the money to "live like royalty" for two years in Monte Carlo. The 2 percent annual coupon bonds mature on January 1, 2024, and it is now January 1, 2004. Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent. If Marie sells her bonds now and puts the proceeds into an account which pays 10 percent compounded annually, what would be the largest equal annual amounts she could withdraw for two years, beginning today (i.e., two payments, the first payment today and the second payment one year from today)? (Points: 10) 10. In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today, January 1, 2004, is as follows: Long-term debt (bonds, at par) Preferred stock Common stock ($10 par) Retained earnings Total debt and equity $10,000,000 2,000,000 10,000,000 4,000,000 $26,000,000 The bonds have a 4 percent coupon rate, payable semiannually, and a par value of $1,000. They mature on January 1, 2014. The yield to maturity is 12 percent, so the bonds now sell below par. What is the current market value of the firm's debt? (Points: 10) 11. Over the past few years, Swanson Company has retained, on the average, 70 percent of its earnings in the business. The future retention rate is expected to remain at 70 percent of earnings, and long-run earnings growth is expected to be 10 percent. If the risk-free rate, rRF, is 8 percent, the expected return on the market, rM, is 12 percent, Swanson's beta is 2.0, and the most recent dividend, D0, was $1.50, what is the most likely market price and P/E ratio (P0/E1) for Swanson's stock today? (Points: 10) 12. Newburn Entertainments stock is expected to pay a year-end dividend of $3.00 a share. (D1 = $3.00, the dividend at time 0, D0, has already been paid.) The stocks dividend is expected to grow at a constant rate of 5 percent a year. The risk-free rate, rRF, is 6 percent and the market risk premium, (rM rRF), is 5 percent. The stock has a beta of 0.8. What is the stocks expected price five years from now? (Points: 10) ... View Full Document