Quiz 2 Problems.docx - Quiz 2 Problems Chapters 6 7 and 8...

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Quiz 2 Problems Chapters 6, 7, and 8 Chapter 7
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1. Eastern Electric currently pays a dividend of $1.64 per share and sells for $27 a share. a. growth rate it 3%, what is the rate of return r = DIV 1 / P 0 + g = [($1.64 1.03)/27] + 0.03 = 0.0926 = 9.26% b. Required rate of return is 10%, what is the growth rate? If r = 0.10, then 0.10 = [($1.64 1.03)/27] + g g = 0.0374 = 3.74%.
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c. sustainable growth rate is 5%, plowback ratio is .4, what is the rate of return g = return on equity plowback ratio 5% = return on equity 0.4 return on equity = 0.125 = 12.5% Chapter 8
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TI-84: APPS, Finance: irr(-36000, {25800,25800}, {1,1} TI-84: APPS, Finance: irr(-56000, {39000,39000}, {1,1}
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TI-84: APPS, Finance: npv(14,-30,{19,19,19},{1,1,1} TI-84: APPS, Finance: npv(14,-55,{30,30,30},{1,1,1} A = 14.11/30 B = 14.65/55
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To solve b: APPS, Finance, TVM Solver: n=6, solve for I, PV=-4600, PMT=1550, FV=0, P/Y=1, C/Y=1 : to solve for I, you will have the cursor on I and then press ALPHA Enter
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Extra Practice Bonds – practice problems Chapter 6 1. A bond has a coupon rate of 7% and has 5 years until maturity. If the current yield to maturity is 5%, what is the price of the bond? What is the amount of the annual interest payment paid to the bondholder? $1,086.59 2. An investor buys a 10-year, 7% coupon bond for $990, holds it for 1 year, and then sells the bond for $980. What was the investor's rate of return? 6.06% 3. What is the price of a zero coupon bond with a 20 year maturity and a yield to maturity of 6% and a par value of $100,000? $31,180.47 4. What is the current yield of a 10-year bond which cost $980 and has a coupon rate of 9% 9.18% 5. If you paid $980 for a 10 year bond that pays $70 a year in interest. What is the bond’s yield to maturity? YTM = Annual interest pmt. + ((Par – Price) / (# yrs. to maturity)) (Yield) .60 (Price) + .40(Par) 7.29% Stock – practice problems Chapter 7 1. What is the dividend yield for a stock that currently pays a $6 dividend per year and the most recent stock price was $60? Ans. - $6/$60 = 10% 2. What should be the price of a stock that offers a $5 annual dividend with no prospects of growth, and has a required return of 10 %? Ans. - $5/.10 = $50 3. What should be the current price of a stock if the expected dividend is $5.00, the stock has a required return of 12%, and a constant dividend growth rate of 5%?
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Ans. - $5/.12-.05 = $71.43 4.
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