Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 12, Problem 14P
In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.05%.
- a. What is the highest expected return these bonds could have?
- b. At the time, similar maturity Treasuries have a yield of 1.5%. Could these bonds actually have an expected return equal to your answer in part (a)?
- c. If you believe Ralston Purina’s bonds have 0.5% chance of default per year, and that expected loss rate in the event of default is 60%, what is your estimate or the expected return for these bonds?
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Lantech investor is deciding between two bonds: Bond A pay $72 annual interest and has a market value of $925. It has 10 years to maturity. Bond B pays $62 annual interest and has a market value of $910. It has two years to maturity. Par value of the bonds is $1,000.
A. What is the current yield on both bonds?
B. Which bond should be chosen and why?
C. A drawback of current yield is that is doesn't consider the total life of the bond. E.g. Yield to maturity on Bond A is 8.33 percent. What is the yield to maturity on Bond B?
D. Is your answer changed from parts B and C based on which bond should be chosen?
In mid-2009, Rite Aid had CCC-rated,19-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 3%. Suppose the market risk premium is 6 % and you believe Rite Aid's bonds have a beta of 0.39. The expected loss rate of these bonds in the event of default is 55%.
a. What annual probability of default would be consistent with the yield to maturity of these bonds in mid-2009?
The required return for this investment is_______%.(Round to two decimal places.)
The annual probability of default is _____%. (Round to two decimal places.)
b. In mid-2015, Rite-Aid's bonds had a yield of 6.7%, while similar maturity Treasuries had a yield of 1.7%. What probability of default would you estimate now?
The probability of default will be_____%. (Round to two decimal places.)
In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 1.53%.
a. What is the highest expected return these bonds could have?
b. At the time, similar maturity Treasuries had a yield of 0.53%. Could these bonds actually have an expected return
equal to your answer in part (a)?
c. If you believe Ralston Purina's bonds have 0.8% chance of default per year, and that expected loss rate in the
event of default is 54%, what is your estimate of the expected return for these bonds?
a. What is the highest expected return these bonds could have?
The highest expected return these bonds could have is%. (Round to two decimal places.)
Chapter 12 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 12.1 - According to the CAPM, we can determine the cost...Ch. 12.1 - What inputs do we need to estimate a firms equity...Ch. 12.2 - How do you determine the weight of a stock in the...Ch. 12.2 - Prob. 2CCCh. 12.2 - Prob. 3CCCh. 12.3 - How can you estimate a stocks beta from historical...Ch. 12.3 - How do we define a stocks alpha, and what is its...Ch. 12.4 - Why does the yield to maturity of a firms debt...Ch. 12.4 - Prob. 2CCCh. 12.5 - What data can we use to estimate the beta of a...
Ch. 12.5 - Prob. 2CCCh. 12.6 - Why might projects within the same firm have...Ch. 12.6 - Under what conditions can we evaluate a project...Ch. 12.7 - Prob. 1CCCh. 12.7 - Prob. 2CCCh. 12 - Prob. 1PCh. 12 - Suppose the market portfolio has an expected...Ch. 12 - Prob. 3PCh. 12 - Suppose all possible investment opportunities in...Ch. 12 - Using the data in Problem 4, suppose you are...Ch. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Suppose that in place of the SP 500, you wanted to...Ch. 12 - Prob. 9PCh. 12 - You need to estimate the equity cost or capital...Ch. 12 - In mid-2012, Ralston Purina had AA-rated, 10-year...Ch. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Your firm is planning to invest in an automated...Ch. 12 - Consider the setting of Problem 18. You decided to...Ch. 12 - Prob. 20PCh. 12 - In mid-2015, Cisco Systems had a market...Ch. 12 - Weston Enterprises is an all-equity firm with two...Ch. 12 - Prob. 24PCh. 12 - Your company operates a steel plant. On average,...Ch. 12 - Prob. 26PCh. 12 - You would like to estimate the weighted average...
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