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# Quiz03Key - Name (Printed) FIN 5405 Financial Management...

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Name (Printed) FIN 5405 Financial Management OEM 2009 Program Quiz 3 - Solutions - Code A July 5,2008 Note: This quiz consists of 10 questions. All questions are worth 1.5 points. By turning in this quiz I am confirming that all work on this quiz is my own and that I have not received help from other individuals in answering the specific questions on this quiz. Student's Signature _ FIN 5405 - Quiz 3 Solutions - OEM 2009 Program - Code A Page 1

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Score _ 1. Assume that you buy a 15-year bond, that will mature for \$1,000 and pays \$40 in coupon interest every six months. Also assume that the yield to maturity at the time of purchase was 9.0 percent, but right after you bought this bond that interest rates (including reinvestment rates) decreased to 8.40% (4.20% per six month period) and are expected to stay at this rate over the life of the bond. Finally, assume that you plan to hold this bond for 5 years and to then sell it in the market. Given this information, determine the "realized compounded yield" you should expect to receive over this 5-year period. * A. B. C. D. E. 9.12% 9.29% 9.46% 9.63% 9.94% Determine Price at Year 0: N = 30; IIYR = 4.5; PMT = 40; FV = 1,000; Solve for PV = \$918.56 = Po Determine Price at Year 5: N = 20; IIYR = 4.2; PMT = 40; FV = 1,000; Solve for PV = \$973.29 = P s Determine Ending Wealth Position: Total Coupons to be Received: (\$40)*(10) = \$400 Future Value of Coupons Reinvested at 4.20 Percent: N = 10; IIYR = 4.2; PMT = 40; Solve for FV = \$484.72 Total Ending Wealth Position: \$973.29 + \$484.72 = \$1,458.01 Calculate Realized Compounded Yield: N = 10; PV = -918.56; FV = \$1,458.01; Solve for IIYR = (4.729)*(2) = 9. ,*, FIN 5405 - Quiz 3 Solutions - OEM 2009 Program - Code A Page 2
2. Your have been following Company A, a new, high-growth company. You estimate that the current risk-free rate is 3.0 percent, the market risk premium is 7 percent, and that the company's beta is 1.40. The current earnings per share (EPS o ) are \$6.80. The company has a 50 percent payout ratio. You also estimate that the company's dividend will grow at a rate of 20 percent this year, 40 percent next year, and 20 percent the following year. After three years the dividend is expected to grow at a constant rate of 5 percent a year. You believe that the stock is fairly priced. Determine the current price of the stock. .* A. S. C. D. E. \$73.80 \$77.19 \$80.59 \$83.98 \$87.38 Use the SMl equation to solve for r s : r s = 0.03 + (0.07)(1.40) = 0.128 = 12.80% Calculate dividend per share: Do = (EPSo)(Payout ratio) = (\$6.80)(0.5) = \$3.40 (You don't get this dividend) Calculate the dividend and price stream (once the stock becomes a constant growth stock): Do = \$3.40 D 1 = \$3.40*1.20 = \$4.08 D 2 = \$4.08*1.40 = \$5.71 D3 = \$5.71 *1.20 = \$6.85 D 4 = \$6.85*1.05 = \$7.20 P 3 = \$7.20 I (.128 - .05) = \$92.31 Use the cash flow register to calculate PV: CF o = 0 CF 1 = 4.08 CF 2 = 5.71 CF 3 = 99.16 (equal to D 3 + P 3 = (\$6.85 + \$92.31) I = 12.8 Solve for NPV = Po = 77.19

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## This note was uploaded on 05/12/2010 for the course FIN 5405 taught by Professor Tapley during the Summer '08 term at University of Florida.

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Quiz03Key - Name (Printed) FIN 5405 Financial Management...

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