Winter 2011 - Week 10 Practice Final Questions (Otavio)

Winter 2011 - Week 10 Practice Final Questions (Otavio) - E...

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Engineering 111: Practice Final 1. Time Warner, a large cap company, will issue a bond with a face value of $2500, a semiannual coupon rate of 10%, and a 5 year lifespan. Calculate the present value of the bond. Assume YTM is 5%. PV = C*[1 – 1/(1 + r) n ]/r + Face Value/(1 + r) n where C is the coupon payment, r is the rate for the compounding period, and n is the number of periods. C = 2500*0.1/2 = $150 (paid out to bondholder every 6 months) n = 10 (ten semiannual periods) r = YTM/2 = 2.5% (yield for each semiannual period) PV = $3047.00 (check here http://www.montegodata.co.uk/scripting/bondvaluecalculator.htm ) 2. Define the CAPM equation. What are its components? Suppose Time Warner stock has a beta of 1.5. What is the expected return? CAPM is to calculate the expected return on a stock based on historical data. r stock,expected = r f + (r β m – r f ) = “Beta”, r β m = market historical return, r f = risk-free rate
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r time warner, expected = 4.5% + 1.5 * (12% - 4.5%) = 15.75% 3. After all new fundraising and financing through additional bond and stock issuances. The company’s balance sheet will look as follows: Cash is $75, Notes Payable is $25, A/P is two times cash, Inventory = IP, IP is two times
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Winter 2011 - Week 10 Practice Final Questions (Otavio) - E...

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