# ADMS3530-Final-S07-Sol - Name _ Section _ ID # _ Prof....

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32 Calculation Questions (4 marks each) 1. The common stock of Robin's Tools sells for \$24.50. The firm's beta is 1.2, the risk- free rate is 4%, and the return on the market portfolio is 12%. Next year's dividend is expected to be \$1.50. Assuming that dividend growth is expected to remain constant for Robin’s Tools over the foreseeable future, what is the firm's anticipated dividend growth rate? A) 6.65% B) 7.48% C) 9.15% D) 13.6% E) 15.0% Solution: B r = 4% + 1.2 x (12% - 4%) = 13.6% and \$24.50 = \$1.50 / (13.6% - g) Leads to g = 7.48% 2. What is the yield to maturity on a 10-year zero-coupon bond with a \$1,000 face value selling at \$742? A) 3.03% B) 7.42% C) 13.48% D) 34.78 E) 42.37% Solution: A YTM = (1000/742) 1/10 -1 = .03029 or 3.03%
3. Consider the following monthly cash flows (see the diagram below): Cash flows of an amount X are made for months 1, 3, 5, …, 17 and 19 (the ten odd- numbered months) and cash flows of an amount Z are made for months 2, 4, 6, …, 18 and 20 (the ten even-numbered months). The APR is 6% and is compounded on a monthly basis. What is the present value of these cash flows today if X = \$2,000 and Z = - \$700? A) 12,311 B) 12,406 C) 25,569 D) 25,664 E) 32,955 Solution: B The monthly interest rate is 0.5% but since the X’s cash flows are made every two months, we need to calculate the 2-months equivalent interest rate: I 2m =% 0025 . 1 1 %) 5 . 0 1 ( 2 = + = r The present value of the Z’s cash flows is given by: Using your calculator: I 2m = 1.0025%, n=10, PMT = -700, FV=0, COMP PV PVz 0 = -\$6629.02 at t=0 (Since fist payment begins at t=2 and “i" is calculated for every 2 month period, and last payment is at t=20) And the present value of the X’s is given by: Since X begins at t=1, using your calculator for a regular annuity will give PV at t =-1 : I 2m = 1.0025%, n=10, PMT = 2000, FV=0, COMP PV PVx --1 = -\$18,940.07 at t= -1 (Since fist payment begins at t=1 and “i" is calculated for every 2 month period, and last payment is at t=19, you are really calculating PV of an annuity at t= -1) To adjust for PVx at t=0-> 18,940.07 x (1.005) 1 = \$19,034.77 The total present value (Z + X) is equal to: 75 . 405 , 12 \$ 02 . 629 , 6 \$ 77 . 034 , 19 \$ = = PV Today 1 2 3 4 19 20 X Z X Z X Z

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## This note was uploaded on 01/26/2010 for the course ADMS 3530 taught by Professor Unknown during the Spring '09 term at York University.

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ADMS3530-Final-S07-Sol - Name _ Section _ ID # _ Prof....

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