CORPORATE FINANCE CHAPTER 5 PROBLEMS 5-1 On January 1, Garrity Jones purchased 1

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CORPORATE FINANCE

CHAPTER 5

PROBLEMS

5-1        On January 1, Garrity Jones purchased 100 shares of Anchor Concrete’s common stock for $80 per share. It is now December 31 of the same year and the market value of the stock is $75 per share. During the year Garrity received dividends that totaled $5 per share.

What is the total dollar return that Garrity earned during the year?

Compute the yield (percent return) associated with the investment for the year.

5-3        Suppose you just sold an investment that you own for $12,500. You purchased the investment four years ago for $10,500. During the time you held the investment, it paid income equal to $1,000 each year. What is the four-year holding period yield that you earned on your investment?

5-9        The following yields on U.S. Treasury securities were recently published in the Wall Street Journal:

                                                            Term                     Rate

6 months               5.0 %

1 year                   5.1

2 years                  5.1

3 years                  5.1

4 years                  5.2

5 years                  5.2

10 years                5.3

20 years                5.3

30 years                5.0

Plot a yield curve based on these data. Discuss how each term structure theory can explain the shape of the yield curve you plot.

5-10      Last year the Fed took action to maintain inflation at a 2 percent level. But, now the economy is starting to grow too quickly, and reports indicate that inflation is expected to increase during the next five years. Assume that the rate of inflation expected for this coming year (Year 1) is 4 percent; for the following year (Year 2), it is expected to be 5 percent; for the year after (Year 3), it is expected to be 7 percent; and, for Year 4 and every year thereafter, it is expected to settle at 4 percent.

What was the average expected inflation rate over the next five year (Year 1 through Year 5)?

Over the five-year period, what average nominal interest rate would be expected to produce a 2 percent real risk-free rate of return on five-year Treasury securities?

Explanation / Answer

Solution for Problem-5-1 A) Compoutation of Dollar return Earned by Garrity Jones. Number of Share Purchased 100 Share Dividend Received (100 *$5) $500.00 Capital gain($80-75)*100 $500.00 Total $ Return ($500+$500) $1,000.00 B. Computation of Yield ( Percent Return) with investment Total Dollar return per share ($1000/100) $10 Share price at the time of investment $75 Percent return ($10/%75*100) 13.33% Note: As pr Chegg Policy, Solution for First Question is allowed in case of multiple different Question

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