S07Assg7

# S07Assg7 - 9.220 CORPORATION FINANCE Sum 2007 Assignment#7...

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9.220 – CORPORATION FINANCE Sum 2007 Professors A Dua Assignment #7 NOTE: This assignment is Not to be handed in! 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 Diversification’s common stock has a β = 1.40. Diversification’s 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 stock. b) Calculate the yield to maturity for Diversification's bonds. Express your answer as i) an effective semi-annual rate. ii) a normal yield to maturity. iii) an effective annual rate. 2. One of Diversification’s 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

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S07Assg7 - 9.220 CORPORATION FINANCE Sum 2007 Assignment#7...

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