S07Assg7soln

S07Assg7soln - FIN 2200 CORPORATION FINANCE Sum 2007...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: FIN 2200 CORPORATION FINANCE Sum 2007 Professors A. Dua Assignment #7 key For questions 1 to 4 assume that R f = 5%, that the expected return on the market portfolio is 15% and that the face value of any bonds is $1,000. Assume the CAPM is true. 1. Diversification, Inc. has the following capital structure: Security Type Market Price Number outstanding Common stocks $25/share 12,000,000 Bonds $1,100/bond 300,000 Assume Diversifications common stock has a = 1.40. Diversifications bonds have a stated coupon rate of 10%; coupons are paid semi-annually; and the bonds mature in 12 years. a) Calculate the expected returns for Diversification's common stock. % 19 ) 05 . 15 . ( 4 . 1 05 . ) R R ( R ] R [ E f M s f s =-+ =- + = b) Calculate the yield to maturity for Diversification's bonds. Express your answer as an effective annual rate. % 83144461 . 8 1 ) 0432231047 . 1 ( ] R [ E % 64462094 . 8 % 32231047 . 4 2 maturity to yield normal % 32231047 . 4 rate annual-semi effective ) r 1 ( 000 , 1 ) r 1 ( 1 1 r 50 100 , 1 ) r 1 ( FV ) r 1 ( 1 1 r C PV 2 B 24 24 T T =-= = = = + + +-= + + +-= 2. One of Diversifications competitors, Consolidated Corp., has a capital structure that consists of $200 million of debt in the form of bonds and $300 million of equity in the form of common stock. The expected returns on Consolidateds securities are E[R stock....
View Full Document

Page1 / 4

S07Assg7soln - FIN 2200 CORPORATION FINANCE Sum 2007...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online