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Finance And Investment Analysis: Key Concepts And Calculations

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    Finance And Investment Analysis: Key Concepts And Calculations, page 1Finance and Investment Analysis: Key Concepts and CalculationsHomework 28 questions1.If the coupon rate is less than the yield to maturity, the bond will:a. sell at parb. sell at premiumc. sell at discount2. ABC Inc. issuedtwelve-year, 6 percent semi-annual coupon bonds at par. Today, the bondsare priced at $1112. What is the firm’s after-tax cost of debt if the tax rate is 30%?Answer:To determine the after-tax cost of debt, we need to follow a few steps.Step 1: Calculate the Yield to Maturity (YTM)The bond price today is $1,112, and it was issued at par (face value = $1,000). The coupon rate is 6%,which means the bond pays $60 annually in interest (6% of $1,000), or $30 semi-annually.•Face value (FV)= $1,000•Coupon rate= 6% (annual), or 3% semi-annually•Semi-annual coupon payment= $30•Current price= $1,112•Number of periods (n)= 12 years × 2 = 24 semi-annual periodsWe can use a financial calculator or an approximation method to find the yield to maturity (YTM). Theformula for YTM on a semi-annual basis is:P=∑t=1nC(1+YTM/2)2t+FV(1+YTM/2)nP =\sum_{t=1}^{n}\frac{C}{(1 + YTM/2)^{2t}} +\frac{FV}{(1 +YTM/2)^{n}}Where:•PP is the current bond price ($1,112)•CC is the semi-annual coupon payment($30)

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    Finance And Investment Analysis: Key Concepts And Calculations, page 2

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    Finance And Investment Analysis: Key Concepts And Calculations, page 3•FVFV is the face value ($1,000)•nn is the number of periods (24)•YTMYTM is the semi-annual yield, and we solve for YTMYTM.The approximate YTM can be calculated using a financial calculator or a spreadsheet. For this problem,the approximate YTM is 5.12% per year or 2.56% semi-annually.Step 2: After-Tax Cost of DebtThe after-tax cost of debt is given by the formula:After-taxcostofdebt=YTM×(1−Taxrate)\text{After-tax cost of debt} = YTM\times (1-\text{Tax rate})Given:•YTM = 5.12%•Tax rate = 30%After-taxcostofdebt=5.12%×(1−0.30)=5.12%×0.70=3.584%\text{After-tax cost of debt} = 5.12\%\times(1-0.30) = 5.12\%\times 0.70 = 3.584\%Final Answer:The after-tax cost of debt is approximately3.58%.3.You have observed the following returns on ABC's stocks over the last six years:3.3%, 5.4%, 18.9%,-12.1%, 3.5%,-8.8%What is thegeometric average returns on the stock over this six-year period.1.2%

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    Finance And Investment Analysis: Key Concepts And Calculations, page 44.Suppose that today's stock price is $52.8. If the required rate onequity is 12.2%andthe growth rate is 7.1%, compute the expected dividend (i.e. compute D1)$2.695.TheABC Co. has $1,000 face value stock outstanding with a market price of $1,017.2.The stock pays interest annually, matures in11 years, and has a yield to maturity of 9.9percent. What is the annual coupon amount?$210.156.Abondthatsellsforlessthanfacevalueiscalledas:a. par value bondb.perpetuityc. premium bondd. debenturee. discount bond7.ThecommonstockofABCIndustriesisvaluedat$26.7ashare.Thecompanyincreasestheirdividendby7.4percentannuallyandexpectstheirnextdividendtobe$2.56.Whatistherequiredrateofreturnonthisstock?17%8.Suppose the real rate is 5.65% and the inflation rate is 5.02%. Solve for the nominalrate.10.95%9. If you receive $1,691 at the end of each year forthe first three years and $7,769 atthe end of each year for the next three years. What is the net present value of this cashflow stream? Assume interest rate is 10.2%.$18576.60

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