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 on corporate
bonds following the patten of Treasury bon
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 applicable tax table is as follows:
Taxable Income
Rate
Mercer University Stetson School of Business and Economics
Semester and Session
Program (EMBA, PMBA, MBA, HCM, BBA)
FIN 362.1W12014F Principles of Finance
Office Hours: By appointment Monday - Friday
Professor: Alex Gasparini
Phone: 770-595-2521
E-mail: g
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) 4.20%
r* +
1.50%
IP+
2.30%
MRP+
0.40%
DRP +
LP
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 the next 10 years. Assume there is no
Maturity Risk Premi
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
required rate of return? Assume that the risk-free
rate
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
preferred stock, and its WACC is 8%, If Magoo has 40 milli
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%, the real risk-free rate remains constant, the
required
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%.
Retained earnings are adequate to provide the common eq
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 Period
Discounted Payback
Year
0
1
2
3
4
5
6
7
8
9
10
11
12
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%. Overslept's
CFO estimates the company's WACC at 12%, What is
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 in addition to the $150,000 that was spent
on the feasi
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 equipment would then be sold after 3
years for $70,000. The eq