Question 3. 3. (TCOs 2 and 3) Bey Co. issued 20-year, $1,000 bonds at a coupon r
ID: 2766789 • Letter: Q
Question
Question 3. 3. (TCOs 2 and 3) Bey Co. issued 20-year, $1,000 bonds at a coupon rate of 7 percent. The bonds make annual payments. If the YTM on these bonds is 5 percent, what is the current bond price? (Points : 20) Question 4. 4. (TCO 3) Sixteenth Bank has an issue of 6% preferred stock with a $100.00 par value that just sold for $89 per share. What is the bank’s cost of preferred stock? (Show your work and round your answer to two decimal places. (Points : 20) Question 5. 5. (TCOs 3 and 5) You own a portfolio that has $2,600 invested in Stock A and $3,400 invested in Stock B. If the expected returns on these stocks are 11 percent and 17 percent, respectively, what is the expected return on the portfolio? (Show your work.) (Points : 20) Question 6. 6. (TCO 3) A stock has a beta of 0.75, the expected return on the market is 12 percent, and the risk-free rate is 3 percent. What must the expected return on this stock be? (Show your work.) (Points : 20) Question 7. 7. (TCO 4) Suppose Pat, Ltd. just issued a dividend of $2.50 per share on its common stock. The company’s dividends have been growing at a rate of 5%. If the stock currently sells for $65, what is your best estimate of the company’s cost of equity? (Show your work.) (Points : 20) Question 8. 8. (TCO 4) Given the following information, calculate the weighted average cost for the Ban Corp. Percent of capital structure: Preferred stock 10% Common equity 70% Debt 20% Additional information: Corporate tax rate 34% Dividend, preferred $8.00 Dividend, expected common $4.00 Price, preferred $80.00 Growth rate 5% Bond yield 7% Price, common $80.00 (Points : 40) Question 9. 9. (TCO 7) What are some important factors to consider when conducting a credit evaluation and scoring? (Points : 20) Question 10. 10. (TCO 1) Explain the roles of managers and shareholders in modern corporations and discuss the possible ethical problems which may arise. (Points : 20) Question 11. 11. (TCO 6) What are the factors that make up the capital asset pricing model? Where would you typically find the data for these factors?
Explanation / Answer
3.30 Bond Par value 1,000 Annual coupon @7% 70 Years to maturity 20 YTM =5% Bond Price Calculation Year Intrerest+Maturity PV factor @5% PV of Cash flows 1 70 0.952 67 2 70 0.907 63 3 70 0.864 60 4 70 0.823 58 5 70 0.784 55 6 70 0.746 52 7 70 0.711 50 8 70 0.677 47 9 70 0.645 45 10 70 0.614 43 11 70 0.585 41 12 70 0.557 39 13 70 0.530 37 14 70 0.505 35 15 70 0.481 34 16 70 0.458 32 17 70 0.436 31 18 70 0.416 29 19 70 0.396 28 20 1,070 0.377 403 1,249.24 So current Bond Price =$1249.24 4.40 6% preferred share with 100par value annual dividend = 6 Market Price of oreferred stock 89 Cost of preferred stock=6/89= 6.74% 5.50 Portfolio Stock A Stock B Total Investment value 2,600 3,400 6,000 % weight in value 43.33% 56.67% Return of Stock 11% 17% Weighted return= 4.77% 9.63% 14.40% Expected return of portfolio=14.4% 6.60 Stock Beta=0.75 Expected Market Return=Rm12% Risk Free rate=Rf=3% Expected Stock Return=Rf+(Rm-Rf)*Beta =3% +(12%-3%)*0.75 9.75% So required return of stock =9.75% 7.70 Current Dividend =D0= 2.50 Dividend growth rate =g=5% Current Stock Price=P0=65 P0=D(1+g)/(k-g) where k is the expected cost of equity 65=2.5*1.05/(k-0.05) 65k-3.250=2.625 k=9.04% So cost of equity =9.04% 8.80 Prefererd dividend 8.00 Price Preferred 80 Cost of Preferred share= 10% Expeceted Common Equity dividend =D1= 4 Price common share=P0= 80 Growth rate dividend =g=5% P0=D1/(k-g) 80=4/(k-0.05) 80k-4=4 k=10% Cost of equity =10% Cost of debt =7% Tax rate =34% Post Tax cost of debt=7%*(1-34%)= 4.62% Type of capital % Weight Post Tax cost WStd cost Preferred stock 10% 10.00% 1.00% Common Equity 70% 10.00% 7.00% Debt 20% 4.62% 0.92% 8.92% So WACC is =8.92%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.