Financial Management

Rules for all problem sets:

· Do your own work. Do not copy material from others.
· Problem sets must be submitted in hard copy form. Do not submit electronically.

Question 1

Everything else being equal, what would happen to a bond's price if Moody's changes this bond rating from Baa to A? Explain.

Question 2

Given the following bond's characteristics.

Par value $1,500 Annual coupon 6.25%, interest payable semi-annually
Maturity 7 years Bond price $1,406

A. Using Excel ONLY, determine this bond's annual "yield-to-maturity." Round percentage answer to 2 decimal points (e.g.: 4.75%, 9.53%, etc.) Attach Excel print-out with appropriate formula and answer.

B. Is this bond priced at premium or discount?

Question 3

You expect interest rates to decrease. From the corporate finance viewpoint, should you currently issue short term or long term bonds? Explain.

Question 4

Given the following financial data for the U.S. economy and a specific company.

U.S. economy:

· U.S. Treasuries annual yield: 2.3%
· Prime rate: 3.5%
· Expected rate of return on stock market: 7.0%
· Inflation rate 2.5%

Company:

· Beta value: 0.85
· Stock price: $50/share
· Earnings per share: $5.00

Based on the above information, calculate this company's "rate of return stockholders require." Show all calculations.