FIN 311_Exam Review 3_F22

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Northern Arizona University *

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311

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Finance

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Feb 20, 2024

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docx

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Uploaded by ProfessorWillpowerStarling33

FIN 311 Exam Review Assignment #3 – Fall 2022 Names ___Colleen Mathias____________ 1. [6 points] A 12-year, $1,000 par value bond has 8 years left to maturity and its coupon rate is 8%, with interest paid semi-annually. Answer the following questions for this bond. a. If the required return on this bond (the current market rate for similar bonds) is 6%, will this bond sell for a premium or a discount (no calculations are needed)? i. Premium b. What is the bond’s current price if the market rate (required return) is 4.5%? i. Coupon= ( .08*1000)/2= 40 (pmt) ii. Number of periods= 8*2=16 iii. Rate= 4.5/2= 2.25 iv. Fv=1000 v. Pv=1232.97 c. If the bond is currently quoted at (selling for) $939.50 in the market, what is the Yield to Maturity? i. Pmt = 40 ii. Periods= 16 iii. Fv= 1000 iv. Pv=-939.5 v. I= 4.54 * 2= 9.08 2. [10 points] You own a stock that you are considering selling. The current dividend is $1.30/share. Your required return for this stock is 8%. The current market price of the stock is $22.50. Consider each of the following situations separately. a. If the dividend is fixed (preferred stock), what is the value of the stock? Should you sell it? i. 1.30/ .08 = 16.25 ii. Yes because it is above 16.25 and it will go down to 16.25 b. If the dividend grows at 3% indefinitely, what is the value of the stock? Should you sell it? i. [1.30(1+.03)]/(.08-.03) = 26.78 ii. No because the price will rise to meet 26.78
c. If the dividend grows at 6% per year for each of the first two years and then 3% indefinitely, what is the value of the stock? Should you sell it? i. D1= 1.30(1+.06) = 1.378= FV pv=1.28 ii. D2= 1.378(1.06)= 1.46068=fv pv=1.25 iii. P2= [1.46068( 1.03)]/( .08-.03)= 30.090008=fv pv=25.797 iv. PMT=0 i%= 8% v. $28.33 is the value 3. [6 points] You are considering purchasing Coca-Cola stock but would like to know more information about risk and returns before you make the purchase. Next year’s possible returns for Coca-Cola and their probabilities of occurring are listed in the table below. Probabilities Possible Returns 20% 3% 55% 8% 25% 12% Calculate: a. The expected return for Coca-Cola. i. .20 * .03= .006 ii. .55*.08=.044 iii. .25*.12=.03 iv. .006+.044+.03=.08 b. The standard deviation for Coca-Cola. i. ( .03 .08 ) 2 .20 + ( .08 .08 ) 2 .55 + ( .12 .08 ) 2 .25 ii. 3% c. The coefficient of variation for Coca-Cola. i. Standard deviation/ mean = .03/,08= 37.5%
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