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Text Problem Sets and Concept and Principles Summary Fin 571

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Text Problem Sets and Concept and Principles Summary

FIN 571

Text Problem Sets and Concept and Principles Summary
Problem A3: (Bond valuation) General Electric made a coupon payment yesterday on its 6.75% bonds that mature in 8.5 years. If the required return on these bonds is 8% APR, what should be the market price of these bonds? PMT -33.75
FV -1000
N 17
Rate 4%
Market Price $923.96

Fair Value of a bond = C/r*(1-1/(1+r)^n)+M/(1+r)^n
Assuming that it’s a semi-annual bond with face value of $1000

A13. (Required return for a preferred stock) Sony $4.50 preferred is selling for $65.50. The preferred dividend is non-growing. What …show more content…

What is the realized return on your investment? CALC: n = 2.5 x 2 =5 r = ? PV = -$500 PMT = 8.8% x 1000 / 2 = $44
FV = $150 - 44 = $106 r = -10.72%
APY = (1 + r)m - 1
APY = (1 - 0.1072)2 - 1
APY = -20.29%
b. The firm does far better than expected and bondholders receive all of the promised interest and principal payments. What is the realized return on your investment? CALC: n = 10 x 2 =20 r = ? PV = -$500 PMT = 8.8% x 1000 / 2 = $44 FV = $1000 r = 10.46%
APY = (1 + r)m - 1
APY = (1 + 0.1046)2 - 1
APY = 22.01%
B12 .
(CAPM) Owego Storage and Housing, Inc., is considering building a new warehouse in Endicott, New York. Owego Storage has 2 million common shares outstanding. The share price is $11. Assume rf = 4.5%, β = 0.75, and rM − rf = 11.5%. Estimate Owego Storage’s required return on its equity investment in the new warehouse.

C1. (Beta and required return) The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here.
Calculate the expected returns on the stock market and on Chicago Gear stock.
What is Chicago Gear’s beta?
What is Chicago Gear’s required return according to the CAPM? 1) Expected Return on Stock Market E(Rstock market) = [(0.20 * -0.10) + (0.35 * 0.10) + (0.30 * 0.15) + (0.15 * 0.25)
Expected Return on Stock Market E(Rstock market) = (-0.02 + 0.035 + 0.045 + 0.0375) Expected Return on Chicago Gear

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