1. You are a bond investor, and you're examining a callable bond. It can be called in 5 years. It is a semiannual bond. The current price in the Wall Street Journal is $1150. They have a 5.35% coupon rate and a 15-year maturity, but they can be called in 5 years at $1,050.50. Calculate the YTM and YTC under those conditions, and explain which you believe you would earn and why.
2. Jelly Jars Inc. has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 4 years at a price of $1,170. What is the bond's nominal yield to call?
3. You hold a diversified $100,000 portfolio consisting of 20 stocks with $5,000 to $10,000 invested in each. The portfolio's beta is 1.12. You plan to sell a $10,000 stock with a beta of .80 and use the proceeds to buy a new stock with b = 2.30. What will the portfolio's new beta be?
4. Salad Makers is trying to figure out their required rate of return. Their beta is currently 1.0, but just acquired some assets that cause the beta to go up by 30%. The market risk premium is 6%, and you've calculated your required return before the change at 10.2%. The firm economist estimates inflation is also going to increase by 2%. Calculate the new required rate.
5. Your boss asked you to calculate an estimate of the firm's price per share of common stock. You estimate the next free cash flow at 27.5 million dollars. You also find that you expect the growth rate to be a constant 7% now, and into the foreseeable future. The firm's required rate of return is 10%, with 80 million dollars of debt and 20 million of preferred stock. With 10 million shares outstanding, what would be your estimate per share?
6. Maniwanout Inc.'s most recent dividend was $1. Analysts expect the company's dividend to grow by 60% this year, by 30% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 10.00%. What is your stock's intrinsic value?
7. You believe you have exhausted all the firm's retained earning and will need to issue new common stock. The next dividend is expected to be $1.25, the current price of the stock is $30/share, and your long term constant growth rate is 6%. If the fees involved created flotation costs of 10%, what would be your estimate for the cost of new common equity?
8. Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 7.0% a year, and the common stock currently sells for $50 a share. Flotation costs are 5% on new common equity. The before-tax cost of debt is 7.50%, and the tax rate is 30%. The company's preferred stock has a current price of $100 per share with a $10 dividend. The target capital structure consists of 45% debt, 5% preferred, and 50% common equity. What is the company's WACC if all the common equity used is from retained earnings?
9. Keys Printing plans to issue a $1,000 par value, 10-year noncallable bond with a 5.00% coupon, paid semiannually. It should sell at par. The company's marginal tax rate is 40.00%. If the company's proxy for retained earnings is calculated at 15%, with at 50/50 debt to equity split in capital structure, what is the WACC?
10. Jed's Iron Work's carries a total of $44 million long-term debt with a coupon rate of 6.00% and a yield to maturity of 5.00% on their balance sheet. This debt currently has a market value of $45 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $60 million. The current stock price is $24.50 per share; stockholders' required return, rs, is 13.00%; and the firm's tax rate is 30%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between these two WACCs?