BFIN 300 Quiz2 solutions

24. What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4% for an investor in the 28% tax bracket?

14. Global Enterprises has just signed a $3 million contract. The contract calls for a payment of $.5 million today, $.9 million one year from today, and $1.6 million two years from today. What is this contract really worth if Global Enterprises can earn 12 percent on its money?

* b.Assume the firm’s stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm’s straight bonds yield 12%. Assume that each warrant will have a market value of $3 when the stock sells at $20. What coupon interest rate, and dollar coupon, must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.)

Its coupon rate is 8.3%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 5.3%. The modified duration of this bond is ______ years.

- Merlo, Inc. maintains a debt-equity ratio of 0.25 and follows a residual dividend policy. The company has after-tax earnings of $3,800 for the year and needs $3,200 for new investments. What is the total amount Merlo will pay out in dividends this year?If debt = 0.25 and equity = 1, then debt + equity = 1.25. Equity portion of new investments = $3,200 × (1 / 1.25) = $2,560.00

23) Danroy Inc has announced a $5 dividend. If Danroy's last price while trading cum-dividend is $65, what should its first ex-dividend price be (assuming perfect capital markets)?

Dividends were assumed to grow at the geometric average of the last 6 years, 20.28%. P0 = D2 Dn Pn D1 + + ··· + + 1 2 n (1 + Ke ) (1 + Ke ) (1 + Ke ) (1 + Ke )n $1.58 $2.28 $87.31 $1.31 + + ··· + + = 1 2 4 (1 + 7.0%) (1 + 7.0%) (1 + 7.0%) (1 + 7.0%)4 = $72.53

a. What would Mrs. Beach have to deposit if she were to use high quality corporate bonds an earned an average rate of return of 7%.

Although the war was called the American “Revolution”, America’s founding documents, including the Constitution and the Bill of Rights, are similar to important British archives, such as the English Bill of Rights and The Spirit of the Laws, as evidenced by the existence of the same three branches of power and rights. In the Constitution of the United States of America (which was written by the people, for the people in 1789), the people describe America’s three branches of power- legislative, executive, and judicial- and who holds it. According to it, the “legislative” power is “vested in congress”, the “executive” branch is “vested in a President”, and the “judicial” power is “vested in one supreme court” Thus,

A bond with an annual coupon of $70 and originally sold at par for $1,000. The current market interest rate (yield to maturity) is 8%. This bond will sell at _______. Assuming no change in market interest rates, the bond will present the holder with capital ________ as it matures.

4-H is America’s largest youth development organization that teaches kids many valuable life skills by hands on learning taught by caring adults. The 4-H program is unique in the fact that it is provided by over 100 land-grand universities throughout the country along with cooperative extension. This is a huge benefit as it allows the volunteers in the communities access to topnotch youth development educators and research to support their local 4-H units. 4-H focuses on hands-on teaching methods to help youth build skills needed to become influential members of society.

2. The discount rate for this bond would be 0.70%. I started with an appropriate discount rate to derive my bond purchase price, since I would not purchase a bond without finding out ahead of time what a good price should be.

b. Generate a graph or table showing how the bond’s present value changes for semi-annually compounded interest rates between 1% and 15%.

3. A european corporation has issued bonds with a par value of Sfr 1,000 and an annual coupon of 5 percent. The last coupon on these bonds was paid four months ago, and their current clean price is 90 percent.

The current EPS of the company is now $14-$15. Historically, the dividend payout ratio mounts to an average 50%. So, the company expects payout the payout in 1959 to be $7/share. In the previous year the dividend rate was cut from $1.3 to $1.2 per share. But after the new deal, the CEO proposed a hike in the quarterly payout to $1.6 per share from the $1.2 given at present. The CEO even suggested the dividend rate to be propped up to $1.80 in 1960.