(c/2) (d0.5 + d1) + d1 = 1 ⇒ c = 2(1-d1)/(d0.5+d1) = 5.8233% e) What is the 0.5-year zero rate? r0.5 = 2(d0.5-1-1) = 5.9406% f) What is the 1-year zero rate? r1 = 2(d1-1/2-1) = 5.8216% g) Considering the shape of the yield curve, should the yield on the 1-year 10%coupon bond be higher or lower than the 1-year par rate? Higher. Both the 10%-coupon bond and the par bond have yields that are some average of the two zero rates.
A company issued a 30-year, $1,000 par value bond that has 10.85% coupon rate. Coupons are paid out semi-annually and the relevant interest rate is 9% compounded semiannually. a. (3 points) What was the value of this bond when it was issued? PMT = (.1085/2)*1000=54.25 N = 60 R = 0.09/2=0.045 (or 4.5 for calculator purposes) FV = 1000 PV =?
Show clearly the steps to arrive at the following estimates in Exhibit 10: Enterprise Value as Multiple of: Revenue EBIT EBITDA Net Income 6,252 8,775 9,023 7,596 6,584 9,289 9,076 7,553 MV Equity as Multiple of: EPS Book Value 4,277 5,904 4,308 5,678 Median Mean If you need to use a discount rate to discount cash flows then an appropriate discount rate estimate for PacifiCorp is approximately 9%. 3. Bid assessment: How do you assess the bid for PacifiCorp by Berkshire Hathaway? How much does Buffett pay for PacifiCorp for its equity and as a whole? How do these values compare with the firm’s intrinsic values estimated above?
ALTERNATIVE PROBLEMS AND SOLUTIONS ALTERNATIVE PROBLEMS 11- 1A. (Individual or Component Costs of Capital) Compute the cost for the following sources of Financing: a. A bond that has a $1,000 par value (face value) and a contract or coupon interior rate of 12%. A new issue would have a flotation cost of 6% of the $1,125 market value. The bonds mature in 10 years.
One of the choices is a corporate bond with a coupon rate 2%, 2-year maturity with par value of £1000 paying annual coupon payment. Suppose
The difference between coupon rate and required return are equal only if the bond sells for exactly par. Questions and problems Problem # 3 Bond prices: Zevon Inc., has 7 percent coupon bonds on the market that have 8 percent left to maturity. The bonds make annual payments. If the YTM on these bonds is 9 percent, what is the current bond price? Bond value= C*[1-1(1+r)^t]/r + F/(1+r)^t = 70*[1-1(1+0.09)^8]/0.09 + 1000/(1+0.09)^8 = 889.30 Problem # 13 Using Treasury quotes: locate the treasury issue in figure 6.3 maturing in June 2023.
If the Company has to prepare financial statements on March 31st, what would the entry be? A Debit to the Put Option and a a. Credit Unrealized holding gain – Income Statement $805 b. Credit Unrealized holding gain – OCI $805 c. Credit Unrealized holding gain – Income Statement $95 d. Credit Unrealized holding gain – OCI $95 e. None of the above 3. Good Citizen, Inc. incurred their first loss during this fiscal year on both their financial statements and tax returns.
The annual growth rate is I in the following equation: $1(1 + I)10 = $2. We can find I in the equation above as follows: Using a financial calculator input N = 10, PV = -1, PMT = 0, FV = 2, and I/YR = ? Solving for I/YR you obtain 7.18%. Viewed another way, if earnings had grown at the rate of 10% per year for 10 years, then EPS would have increased from $1.00 to $2.59, found as follows: Using a financial calculator, input N = 10, I/YR = 10, PV = -1, PMT = 0, and FV = ?. Solving for FV you obtain $2.59.
Week 3 Pg 210-211 5-1 Bond Valuation with Summary Payments (N = 12; I/YR = YTM = 9%; PMT = 0.08 × 1,000 = 80, FV = 1000) PV = 928.39 5-2 Yield to Maturity for Annual Payments (N = 12; PV = -850; PMT = 0.10 × 1,000 = 100; FV = 1000) YTM = 12.48% 5-6 Maturity Risk Premium r* = 3%; IP = 3%; rT-2 = 6.3%; rT-2 = r* + IP + MRP = 6.3% rT-2 = 3% + 3% + MRP = 6.3% MRP = 0.3% 5-7 Bond Valuation with Semi Annual Payments (N = 16; I/YR = 8.5/2 = 4.25; PMT = 50; FV = 1000) PV=1,085.80 5-13 Yield to Maturity and Current Yield N = 5, PMT = 80, and FV = 1000 Current yield = Ann interest/Current price 0.0821 = $80/PV PV = $80/0.0821 = $974.42 (N = 5, PV = -974.42, PMT = 80, and FV = 1000) = 8.65% 6-6 Double Beta pg 257 If a company’s beta were to double, would its expected return double? If a company’s beta were to double the expected return wouldn’t because an increase in beta would increase a company’s expected return only by the amount equal to the market risk premium multiplied by the change in the beta amount. Pg 258-259 6-1 Portfolio Beta An individual has $35,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a beta of 1.4. If these are the only two investments in her portfolio, what is her portfolio’s beta? $35,000 0.8 1st Investment, 40,000 1.4 2nd Investment Total $75,000 ($35,000/$75,000)(0.8) + ($40,000/$75,000)(1.4) = 1.12 6-2 Required Rate of Return Assume that the risk-free rate is 6% and that the expected return on the market is 13%.
Given the following cash flow stream at the end of each year: Year 1: $4,000 Year 2: $2,000 Year 3: 0 Year 4: -$1,000 Using a 10% discount rate, the present value of this cash flow stream is: a. $4,606 b. $3,415 c. $3,636 d. Other 8. Consider a 10-year annuity that promises to pay out $10,000 per year, given this is an ordinary annuity and that an investor can earn 10% on her money, the future value of this annuity, at the end of 10 years, would be: a. $175,312 b.