Fin 360 – Fall 2009
Homework Assignments 1 through 3
Solutions
Assignment #1
Chapter 2 problems: 1, 8, 9, 11, 17
1. Taxable equivalent yield = .0675 / (1-.35) = .1038
8.
a.
At t = 0, the value of the index is: (90 + 50 + 100)/3 = 80
At t = 1, the value of the index is: (95 + 45 + 110)/3 = 83.3333
The rate of return is: (83.3333/80) – 1 = 4.167%
b.
In the absence of a split, stock C would sell for 110, and the value of the
index would be: (95 + 45 + 110)/3 = 83.3333
After the split, stock C sells at 55.
Therefore, we need to set the divisor
(d) such that:
83.3333 = (95 + 45 + 55)/d….
.d = 2.340
c.
The rate of return is zero.
The index remains unchanged, as it should,
since the return on each stock separately equals zero.
9.
d.
Total market value at t = 0 is: (9,000 + 10,000 + 20,000) = 39,000
Total market value at t = 1 is: (9,500 + 9,000 + 22,000) = 40,500
Rate of return = (40,500/39,000) – 1 = 3.85%
e.
The return on each stock is as follows:
R
a
= (95/90) – 1 = 0.0556
R
b
= (45/50) – 1
= –0.10
R
c
= (110/100) – 1 = 0.10
The equally-weighted average is: [0.0556 + (-0.10) + 0.10]/3 =
0.0185 = 1.85%
11.
f.
The taxable bond.
With a zero tax bracket, the after-tax yield for the
taxable bond is the same as the before-tax yield (5%), which is greater
than the yield on the municipal bond.
g.
The taxable bond.
The after-tax yield for the taxable bond is:
0.05 x (1 – 0.10) = 4.5%
h.
You are indifferent.
The after-tax yield for the taxable bond is: