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

  • No School
  • AA 1
  • ahkuoid80
  • 60

This preview shows page 7 - 13 out of 60 pages.

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
Image of page 7

Subscribe to view the full document.

The 30-year zero coupon bond is the most sensitive to the change in interest rate.
Image of page 8
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%.
Image of page 9

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
Image of page 10
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%
Image of page 11

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.
Image of page 12
Image of page 13
  • Fall '19
  • Dividend yield

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes