2nd Test Answers (1).pdf - Midterm 2 version A(odd exam...

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Midterm 2 – version A(odd exam numbers) answers Version A (odd exam number) 1 A 6 C 11 B 16 D 21 C 2 B 7 D 12 C 17 B 22 C 3 B 8 D 13 D 18 A 23 A 4 B 9 B 14 D 19 B 24 A 5 B 10 A 15 C 20 D 25 D Version B (even exam number) 1 D 6 D 11 C 16 A 21 B 2 A 7 B 12 D 17 B 22 B 3 A 8 A 13 D 18 D 23 B 4 C 9 B 14 C 19 D 24 B 5 C 10 D 15 B 20 C 25 A (In version B, Q1 is the same as Q25 in version A, Q2 is the same as Q24 in version A, and so on, so you can use these solutions for both versions of the exam) 1) 3 years have passed since the bond issuance, therefore it now has 22 years to maturity. Apply the bond value formula with semi-annual coupon of $37.5 (=$75/2), semi-annual required rate of return of 5.25% (=10.5%/2) and a number of periods equal to 44 (=22*2): P = $37.5 * (1 – 1/1.0525 44 )/0.0525 + 1000/1.0525 44 = 639.1062 + 105.2513 ~ $ 744.3575 ~ $ 744 3) Use Gordon model to find the most recent dividend DIVo. Value of common stock: g k DIV g k DIV g V cs cs o cs = + = 1 ) 1 ( ; 34 = 1.02* Divo / (0.14-0.02) => DIV o = 34*0.12 / 1.02 = 4 4) From the bond value formula: 920 = 1000/ (1+i) 4 (1+i) 4 = 1000/920 = 1.086957 (1+i) = 1.086957 1/4 1 + i = 1.021064 i = 2.1064 % ~ 2% 1 This study resource was shared via CourseHero.com
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