Question 1 - Bond Valuation Assume the following information for bonds A and B. Both bonds have the same YTM and have semi-annual coupon payments. Bond B is currently selling at par. Face Value Maturity Coupon Rate Bond A 1000 30 yrs 8% Bond B 1000 20 yrs 10% a) What is the price for Bond B (2 pts)? What is the current yield for Bond B (2 pts)? Bond A is selling at a ________(discount /par/
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long-term values. It is also important to use market value rather than book value because the market value is a better estimate of the total debt and total equity of the firm. We decided to calculate our own WACC because we disagreed with the assumptions Joanna made. We found the WACC to be 6.59%. To calculate this we used the market values of debt and equity so our weights for each were 10.05% and 89.95% respectively. This was one main difference between our WACC and Joanna’s. We also had a difference
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Exam 2 Finance 470 1. When is EAC analysis appropriate for comparing two or more projects? Why is this method used? Are there any implicit assumptions required by this method that you find troubling? Explain. The EAC approach is appropriate when comparing mutually exclusive projects with different lives that will be replaced when they wear out. This type of analysis is necessary so that the projects have a common life span over which they can be compared; in effect‚ each project is assumed
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BETA MANAGEMENT COMPANY Q1. Calculate the variability (standard deviation) of the stock returns of California REIT and Brown Group during the past 2 years. How variable are they compared with Vanguard Index 500 Trust? Which stock appears to be riskiest? The stock returns for each month are given in Table 1. Based on the monthly returns‚ the standard deviation or variability of each stock has been calculated. The standard deviation for California REIT is 9.23% and the standard deviation for Brown
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• Explain what is meant by a firm’s weighted average cost of capital. • Define and calculate the component costs of debt and preferred stock. • Explain why retained earnings are not free and use three approaches to estimate the component cost of retained earnings. • Briefly explain why the cost of new equity is higher than the cost of retained earnings‚ calculate the cost of new equity‚ and calculate the retained earnings breakpoint--which is the point where new equity would have to be
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Midland Energy Resource Case Study Introduction Midland Energy Resources is a fairly successful global energy company which had been incorporated more than 120 years previously and in 2007 had more than 80‚000 employees. It has three main operations‚ oil and gas exploration and production (E&P)‚ refining and marketing (R&M)‚ and petrochemicals. E&P is the most profitable segment of Midland and its net margin over the previous five years was among the highest in the industry. Its largest division
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end of each year. The preferred sells for $50 a share. What is the stock’s required rate of return? 10% Required Return = Dividend / Price (7–5) Nonconstant Growth Valuation Nonconstant Growth Valuation Step 1: Calculate the required rate of return using CAPM A company currently pays a dividend of $2 per share (D0 = $2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years‚ then at a constant rate of 7% thereafter. The company’s
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investment. Therefore‚ the key to evaluate the effectiveness of the 15.66% IRR is to have it compared with required rate of return or cost of capital for the project. 3. WACC Estimation Given the information in the case‚ we should calculate the cost of capital or WACC for this project. In this case‚ we select the general WACC method. The formula is as follows: ! ! ???? = ?! ! + ?! ! 1 − ?! (1) where ?! denotes the cost of equity‚ ?! denotes the cost of debt‚ and ?! denotes
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Chapter 6: Pharma BioTech Mini Case (pp. 229-230‚ Part A only) Pharma Biotech is interested in developing an initial “big picture” of the size of financing that might be needed to support its rapid growth objectives for 2011 and 2012. A. Calculate the following financial ratios (as covered in Chapter 5) for Pharma Biotech for 2010: (a) net profit margin‚ (b) sales-to-total-assets ratio‚ (c) equity multiplier‚ and (d) total-debt-to-total-assets. Apply the return on assets and return on equity
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discount appropriate cash flows by the appropriate and related divisional hurdle rate. This allows them to calculate the Net Present Value (NPV) of investment projects and evaluate their future and current investments. Also‚ Marriott has considered using their hurdle rates as a method of determining incentive compensation for managers. Calculating Marriott’s WACC: In order to calculate the WACC for the whole of Marriott‚ we are required to use the equity beta provided in exhibit 3 of the case
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