Bond valuation-Lahey Industries has outstanding

Bond valuation-Lahey Industries has outstanding

Subject: Business    / Finance
Question
Chapter 6:
Bond valuation: Lahey Industries has outstanding a $1,000 par-value bond with an 8% coupon interest rate. The bond has 12 years remaining to its maturity date.
(a). If interest is paid annually, find the value of the bond when the required return is (1) 7%, (2) 8%, (3) 10%.
(b) Indicate for each case in part a whether the bond is selling at a discount, at a premium, or at its par value.
( c) Using the 10% required return, find the bond’s value when interest is paid semi-annually.

Chapter 7:
Common stock valuation: Perry Motor’s common stock just paid its annual dividend of $1.80 per share. The required return on the common stock is 12%. Estimate the value of the common stock under each of the following assumptions about the dividend:
(a.) Dividends are expected to grow at an annual rate of 0% to infinity.
(b.) Dividends are expected to grow at a constant annual rate of 5% to infinity.
(c.) Dividends are expected to grow at an annual rate of 5% for each of the next 3 years, followed by a constant growth rate of 4% in years 4 to infinity.

Chapter 8:
Portfolio analysis: You have been asked for your advice in selecting a portfolio of assets and have been given the following data: Expected Return
Year Asset A Asset B Asset C
2013 12% 16% 12%
2014 14 14 14
2015 16 12 16
You have been told that you can create two portfolios-one consisting of assets A and B and the other consisting of Asset A and C-by investing (50%) in each of the two component assets.
a.    What is the expected return for each asset over the 3-year period?
b.    What is the scheduled deviation for each asset’s return?
c.    What is the expected return for each of the two portfolios?
d.    How would you characterize the correlations of returns of the two assets making up each of the two portfolios indentified in oart c?
e.    What is the standard deviation for each portfolio?
f.    Which portfolio do you recommend? Why?

Chapter 9:
Individual costs and WACC Humble Manufacturing is interested in measuring its overall cost of capital. The firm is in the 40% tax bracket. Current investigation has gathered the following data:

Debt : The firm can raise debt by selling $1,000-par-value, 10% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $30 per bond must be given. The firm must also pay flotation costs of $20 per bond.
Preferred stock: The firm can sell 11% (annual dividend) preferred stock at its $100-per-share par value. The cost of issuing and selling the preferred stock is expected to be $4 per share.
Common Stock: The firm’s common stock is currently selling for $80 per share. The firm expects to pay cash dividends of $6 per share next year. The firm’s dividends have been growing at an annual rate of 6%, and this rate is expected to continue in the future. The stock will have to be underpriced by $4 per share, and floatation costs are expected to amount to $4 per share.
Retained earnings: The firm expects to have $225,000 of retained earnings available in the coming year. Once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.

a.    Calculate the individual cost of each source of financing. (Round to the nearest 0.1%)
b.    Calculate the firm’s weighted average cost of capital using the weights shown in the following table, which are based on the firm’s target capital structure proportions. (Round to the nearest 0.1%).
Source of capital Weight
Long-term debt 40%
Preferred stock 15
Common stock equity 45
Total: 100%

C. In which, if any, of the investments shown in the following table do you recommend that the firm invest? Explain your answer. How much new financing is required?
Investment Expected rate Initial
Opportunity of return investments
A 11.2% $100,000
B 9.7 500,000
C 12.9 150,000
D 16.5 200,000
E 11.8 450,000
F 10.1 600,000
G 10.5 300,000

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