You must show your work step by step, If excel is used please show formulas Prob

Question

You must show your work step by step, If excel is used please show formulas

Problem 1

            M.G.Buffon Company's last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. What is the best estimate of the current stock price? Assume that the firm's beta coefficient is 1.1429, rM is 11 percent, and rRF is 4 percent.

B

           A. Consigli Inc.'s stock has a required rate of return of 11.50%, and   it sells for $35.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend paid by the company?

C

    M. Perin Industries has a bond outstanding with 15 years to maturity, an 8.25% coupon, semiannual payments, and a $1,000 par value. The bond has a 6.50% yield to maturity, but it can be called in 5 years at a price of $1,120. What is the bond’s yield to call?

D

    Consider the following information and then calculate the required rate of return for the De Rossi Hedge Fund, which holds 4 stocks. The market’s required rate of return is 12.25%, the risk-free rate is 5.00%, and the Fund’s assets are as follows:

Stock                                Investment                                  Beta

A                                       $ 200,000                                 1.50

B                                         300,000                                 0.50

C                                         500,000                                 1.25

D                                        $1,000,000                               0.75

Explanation / Answer

1) Cost of equity, r = Rf + beta x (Rm - Rf) = 4% + 1.1429 x (11% - 4%) = 12%

Current Dividend D0 = 1.55, D1 = 1.55 x (1 + 1.5%) = 1.57, D2 = 1.57 x (1 + 1.5%) = 1.60, D3 = 1.60 x (1 + 8%) = 1.72

Price today, P0 = D1 / (1 + r) + D2 / (1 + r)^2 + D3 / (r - g) x (1 + r)^2

= 1.57 / 1.12 + 1.60 / 1.12^2 + 1.72 / (12% - 8%) / (1 + 12%)^2

= $37.05

2) P0 = D0 x (1 + g) / (r - g)

=> Last diviend D0 = P0 x (r - g) / (1 + g) = 35 x (11.5% - 7%) / (1 + 7%) = 1.47

3) Bond Price can be calculated using PV function

N = 15 x 2 = 30, PMT = 8.25% x 1000 / 2 = 41.5, FV = 1000, I/Y = 6.5%/2 = 3.25%

=> Compute PV = $1,170.84

YTC can be calculated using I/Y function

N = 5 x 2 = 10, PV = -1170.84, FV = 1120, PMT = 41.5

=> Compute I/Y = 3.17% (semi-annual)

=> Annualized YTC = 3.17% x 2 = 6.34%

4) We need to calculate the weighted average of beta for the portfolio

Beta = 200/2000 x 1.5 + 300/2000 x (-0.5) + 500/2000 x 1.25 + 1000/2000 x 0.75

= 0.7625

Required Return = Rf + beta x (Rm - Rf)

= 5% + 0.7625 x (12.25% - 5%)

= 10.53%

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