Assignment - Finance Questions

Part A -

Your supplier offers you the trade credit terms "2/10 net 50." In other words, if you pay within 10 days you get a 2% discount off the list price. Otherwise the full list price is due within 50 days.

1. Assuming a 360 day year, there are _________compounding periods in a year.

2. Rounded to four places and expressed as a decimal (not a percent) the periodic rate is____________.

3. Rounded to four places, and expressed as a decimal (not a percent) the effective annual rate (EAR) is____________.

Part B - Assume in the following option questions that options are on stocks that do not pay a dividend.

1. How can you tell that a security is a derivative? (What is a distinct characteristic of a derivative?)

2. If you bought a put option, you want the stock price to rise or fall?

3. If you bought a call option, you want the risk-free interest rate to rise or fall?

4. You wrote a put option. You want the volatility of the underlying stock return to rise or fall?

5. There are two American call options. They are identical, except that Option A has a longer time to expiration than Option B. Which option is more valuable?

Part C - Mortgages have an APR (annual percentage rate - a stated rate) of 9.12%. Payments and compounding are monthly. You would like to borrow $550,000 in order to buy a house in Newbury Park, and wish to take out a 20 year mortgage. Fees are included as part of the loan. Enter your answers below as they would appear in the formula (not how they would appear in the financial keys.)

1. The periodic monthly rate is_________.

2. Your monthly payment, rounded to the nearest penny is $______.

3. The interest portion of the first payment will be $__________.

4. The principal portion of the first payment will be $__________.

Part D - You know the following about Stock i:

σ_i,M = .07744, σ²_M = .0484,  r_M =.0880 and r_RF = .0180

a. The beta for stock i is __________

b. The expected return for stock i is __________

Stock i just paid a dividend of $4.40 at the end of t=0 (today). The company has a policy of increasing the dividend by 5% each year, and the dividend is paid once a year. In other words, the dividend next year will be 5% higher than this year, and so forth, and so on, forever.

The dividend at t=0 (rounded to the nearest penny) is $ __________.

The dividend at t=1 (rounded to the nearest penny) is $ ___________.

c. The stock is ex dividend. The price of the stock, rounded to the nearest penny is $ __________.

d. The price of the stock just before the dividend was paid at t=0, rounded to the nearest penny is $ ____________.

Part E - A 14 year risk-free bond has a price of $621.36. The coupon rate is 3.7%, and the face value is $1,000. Assume coupon payments are annual.

The YTM (yield to maturity) of the bond, written as a percent is _________ %.

1. The bond is selling below, at, or above par?

2. Over time, bond prices will fall, stay the same, or rise?

3. If interest rates do not change, the bond return, as a percent, will be __________%.

4. Suppose interest rates suddenly fall. The bond price will respond by falling, staying the same, or rising?

The definition (i.e. formula) for the Operating Profit Margin is ________________?

Part F - You are evaluating Company B and know the following:

σ_i,M = .0520, σ²_M = .0400, r_M = .0890 and r_RF = .0190

The marginal corporate tax rate is 35%. The YTM (yield to maturity) on the debt of Company B (incorporating floatation costs) is 5.39%. Company B issued preferred stock for $780.00 per share net of flotation costs. The preferred pays an annual dividend of $61.62 per share. The book value of the debt is $36,400,000 and you decide that this is close to the market value of the debt. The market value of all the preferred shares is $23,800,000 and the market value of the common stock is $79,800,000.

A. The Beta for Company B's common stock is_________?

B. The expected return for Company B's common stock, (written as a decimal) is_________?

C. The expected return for Company B's preferred stock (the cost of preferred including floatation costs) is ____________ **written as a decimal.

D. The weight of the debt is ______?

E. The weight of the preferred is ________?

F. The weight of the common stock is ____________?

G. The WACC (weighted average cost of capital) for Company B is __________.

Be sure to carry out 4 places in your calculations.

1. When considering whether a company is doing a good job of controlling expenses, the best ratio to address the question is____________.

2. When looking at whether a company has liquid assets it can sell to cover short-term debts, a good ratio to look at is the________________.

3. A good ratio to measure whether managers are pleasing common shareholders is________.

4. A company has issued a 14 year, 6% coupon bond with a face value of $1,000. The bond has a rating of BBB. The CFO is informed that the bond rating will be upgraded to an AA-. A typical 14 year bond with a AA- rating has a YTM of 2.5%.

a. The CFO expects the new bond price, rounded to the nearest penny, to be $ __________.

b. The bond price will rise/fall?

c. The YTM on the bond will rise/fall?