Saint MBA570 Module 4 Homework Latest November 2016

Subject: Business / Management
Question
Q 1

A 1010?-year bond with a face value of $ 1 comma 000$1,000 has a coupon rate of 7.50 %7.50%?, with semiannual payments.??

a. What is the coupon payment for this? bond?

b. Enter the cash flows for the bond on a timeline.

Q 2

The following table summarizes prices of various? default-free zero-coupon bonds? ($100 face? value):

Maturity? (years)

1

2

3

4

5

Price? (per $100 face? value)

?$96.8596.85

?$92.4192.41

?$87.9087.90

?$83.2883.28

?$78.1578.15

a. Compute the yield to maturity for each bond.

b.Plot the? zero-coupon yield curve? (for the first five? years).

c.Is the yield curve upward? sloping, downward? sloping, or? flat?

Q 3

Suppose a 1010?-year, $ 1 comma 000$1,000 bond with a 7 %7% coupon rate and semiannual coupons is trading for a price of $ 1 comma 152.66$1,152.66.

a. What is the? bond’s yield to maturity? (expressed as an APR with semiannual? compounding)?

b. If the? bond’s yield to maturity changes to 8 %8% ?APR, what will the? bond’s price? be?

Q 4

Assume the? zero-coupon yields on? default-free securities are as summarized in the following? table:

Maturity

1 year

2 years

3 years

4 years

5 years

?Zero-Coupon Yields

3.603.60?%

4.204.20?%

4.504.50?%

4.804.80?%

4.904.90?%

What is the price of a? three-year, default-free security with a face value of

$ 1 comma 000$1,000

and an annual coupon rate of

6 %6%??

What is the yield to maturity for this? bond?

Q 5

The following table summarizes yields to maturity on several? 1-year, zero-coupon? securities:

Security

Yield

Treasury

2.9302.930?%

AAA Corporate

3.5063.506?%

BBB Corporate

4.0984.098?%

B Corporate

4.7714.771?%

a.What is the price? (expressed as a percentage of the face? value) of a? 1-year, zero-coupon corporate bond with a? AAA-rating and a face value of

$ 1 comma 000$1,000??

b. What is the credit spread on? AAA-rated corporate? bonds???

c. What is the credit spread on? B-rated corporate? bonds?

d.??How does the credit spread change with the bond? rating? Why?

Q 6

Anle Corporation has a current price of $ 12$12?, is expected to pay a dividend of $ 1$1 in one? year, and its expected price right after paying that dividend is $ 30$30.

a. What is? Anle’s expected dividend? yield?

b. What is? Anle’s expected capital gain? rate?

c. What is? Anle’s equity cost of? capital?

Q 7

Summit Systems will pay a dividend of $ 1.63$1.63 one year from now. If you expect? Summit’s dividend to grow by 5.3 %5.3% per? year, what is its price per share if its equity cost of capital is 11.9 .9%??

Q 8

Heavy Metal Corporation is expected to generate the following free cash flows over the next five? years:

Year

1

2

3

4

5

FCF? ($ million)

51.251.2

69.669.6

78.578.5

75.675.6

83.483.4

After? that, the free cash flows are expected to grow at the industry average of

4.4 %4.4%

per year. Using the discounted free cash flow model and a weighted average cost of capital of

13.5 .5%?:

a. Estimate the enterprise value of Heavy Metal.

b. If Heavy Metal has no excess? cash, debt of

$ 303$303

?million, and

4242

million shares? outstanding, estimate its share price.

Q 9

You read in the paper that Summit Systems will pay a dividend of $ 1.00$1.00 this year. At that point you expected? Summit’s dividend to grow by 7.0 %7.0% per year. Today you read in the paper that Summit Systems has revised its growth prospects and expects its dividends to grow at a rate of 3.0 %3.0% per year forever. If the? firm’s equity cost of capital is 11.0 .0%?:

a. What is the value of a share of Summit Systems stock based on the original expected dividend growth of 7.0 %7.0% per? year?

b. If you tried to sell your Summit Systems stock after reading this? news, what price would you be likely to? get? Why?

Q 10

Assume that Cola Co. has a share price of $ 43.13$43.13. The firm will pay a dividend of $ 1.15$1.15 in one? year, and you expect Cola Co. to raise this dividend by approximately 6.2 %6.2% per year in perpetuity.

a. If Cola? Co’s equity cost of capital is 8.1 %8.1%?, what share price would you expect based on your estimate of the dividend growth? rate?

b. Given Cola? Co’s share? price, what would you conclude about your assessment of Cola? Co’s future dividend? growth?

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