MM Motors is selling an issue of bonds with a 10 year maturity a 1000 par value

Mm motors is selling an issue of bonds with a 10 year

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MM Motors is selling an issue of bonds with a 10-year maturity, a \$1000 par value, an 8% co made annually. BP = {annual interest * PVIFA (r, n)} + face value * PVIF (r, n)} = \$ 1000.012 One year ago Clark Company issued a 10-year, 12% semi-annual coupon bond at its par va today if the required rate of return is 9%? = \$1182.40 An investor has purchased the following 5 bonds. Each bond had a par value of \$1000 and a purchase. Immediately after the investor purchased them, interest rates fell and each bond t Subscribe to view the full document.

The 30-year zero coupon bond is the most sensitive to the change in interest rate. will the bonds now sell? use the table below). 6.75% 9.75% 4.76% 32.19% 14.29% oupon rate. Payments of interest are to be alue of \$1000. What is the value of this bond an 8% yield to maturity (YTM) on the day of then had a new YTM of 7%. Subscribe to view the full document.

Section 3: Capital Asset Pricing Model and Cost of Capital a. Required rate of return RRR = 6% + 1.4 (14% - 6% = 0.06 + 1.4 (0.14 – 0.06) = 0.06 + 0.112 = 0.172 x 100 RRR = 17.2% b. If the required rate of return on stock M, is 17%, the risk free rate is 6% and Expected Return = Risk free rate+ (Beta *(Market Return - risk fr So expected return of stock M given = 15% 17% = 6% +(Beta *(15% -6%)) 11% = Beta *9% Beta = 11%/9% = 1.222222222 So, beta of stock M is 1.2222 c. Delta Inc. has a beta of 1.6. Assuming the risk free rate is 6% and the marke Expected Return = Risk free rate+ (Beta * market risk premium) Expected Return of B = 6% + (1.6*7%) 0.172 or 17.2% d. If we made up a portfolio that is 70% invested in Delta Inc (details as in (c) a (i) What is the expected return for the portfolio? Weight of B = 70% Risk free weight = 30% Risk free rate =6% Beta of risk free is always = 0 Expected return of portfolio = (Expected return of B * Weight B) 0.1384 or 13.84% (ii) What is the beta for this portfolio? Beta of portfolio = (Weight of B * beta) + (weight of Risk free * b 1.12 1.12% Suppose the risk free rate, r RF is 6%, the return on the market, r M is 14% and e. Alpha Corp required Return = Risk free rate+ (Beta * marke =5% +(1.5*7%) 0.155 or 15.5% Expected return is 16%. So stock is not a good buy f. Suppose you are the money manager of a \$150 million investment fund. The Investment Fund \$150,000,000 Stock Beta Weight A \$50,000,000.00 1.6 33.33% B \$5,000,000.00 -0.05 3.33% C \$60,000,000.00 1.3 40.00% D \$35,000,000.00 0.75 23.33% 1.000 If the market’s required rate of return is 14% and the risk free rate is 6%, wh Portfolio Beta = (0.33 x 1.6) + ( 0.03X-0.05) + (0.40 X 1.3) + (0.23 X 0.75) = 1.23 g. A stock has a required rate of return of 13%. If the risk free rate is 5% and th Required rate = RF + beta (ERM - RF) (i) What is the stock’s beta? Required rate = RF + beta (ERM - RF) Alpha Corp. has a beta of 1.5 and an expected market return of 16%. Given market risk premium is 7%, would a purchase of Alpha Corp. stock be a goo Investment Amount \$m = 6% + 1.23 (14% - 6%) = 6% + 9.84% = 15.84% 13% = 5% + beta * (6%) 13% - 5% = beta * 6% 8% = beta * 6% Subscribe to view the full document.

(ii) If risk premium increases to 8% then: Required rate = RF + beta (ERM - RF) 0.1564 or 15.64% when the risk premium of any security rises then required rate o h. = \$5 / \$60 i. (i) (ii) = 13% * (1 - 30%) 0.091 or 9.1% WACC = (weight of debt * cost of debt) + weight of equity * cost 0.11632 or 11.63% Calculate Andover’s WACC using market value weights Cost of equity = 14% Cost of debt = 10% * (1 - 30%) Beta = 1.33 If the market risk premium increased to 8%, what would happen to the stock occur? Assume that the risk free rate and the beta remain unchanged.  • Fall '19
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