In Chapter 6 we talked about the yield curve which
is the relationship between interest rates and time to
maturity. In this chapter we expand the discussion to
corporate bonds. Is the yield structure
1
CHAPTER TWO PROBLEMS
1.
Your corporation has the following cash flows:
Operating income
$250,000
Interest received
10,000
Interest paid
45,000
Dividends received
20,000
Dividends paid
50,000
If the
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FIN 362.1W12014F Principles of Finance
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The real risk free rate is 1.5% and inflation is
expected to be 2.3% for the next 3 years. A 3 year
Treasury security yields 4.2% . What is the maturity
premium for the 3 year security?
r=
Treasury (3
Exercise 1 (15 pts.)
A 5 year Treasury bond has a 3.4% yield. A 10 year
Treasury bond yields 4.5%, and a 10 year corporate bond
yields 9.7%. The market expects that inflation will
average 2.6% over th
A stock has a required return of 9%. The risk-free
rate is 5% and the market risk premium is 3%. What
is the stock's beta? If the market risk premium
increased to 4%, what would happen to the stock's
Magoo Contacts & Glasses, Inc. is expected to generate 300 million in
free cash flow next year, and the FCF is expected to grow at a
constant rate of 3% per year indefinitely. Magoo has no debt or
pre
Exercise 1
Williams has a beta of 2.0 while Hemberg has a beta of 0.4.
The risk-free rate is 5%, and the required rate of return
on an average stock is 12%. The expected rate of inflation
falls by 1%,
EX.1
Lucky Inc. has a target capital structure of 53% common equity
and 47% debt to fund its 5 billion in operating assets. Its WACC
is 12%. Its before tax cost of debt is 9.89%. Its tax rate is 35%.
A project costs $100,000. It's expected cashflow is $10,000 per year for
12 years. and its WACC is 14%. What's the project NPV, IRR?, MIRR?
Payback and Discounted Payback?
$
NPV
IRR
MIRR
Payback Perio
Overslept Pharmaceuticals has a capital structure of
45% debt and 55% Equity, with no preferred stock.
The yield to maturity on the company's outstanding
bond is 10.8%. and its tax rate is 35%. Oversl
ABC Corporation is considering an expansion project. To date they have spent $150,000 investigating the viability of the
project and have decided to proceed. The proposed project will cost $1,500,000
A new piece of Equipment costs $150,000. There would be another $40,000 in installation costs. Depreciation would be
MACRS 3-year class with depreciation rates of 33%, 45%, 15% and 7%. The new equipme