Answer the two questions:
Instructions:
1) Show all the calculations in detail.
2) Make tables wherever necessary.
3) Give adequate explanation about the steps involved in solving the question.
4) Give a brief idea about the topic that is involved in the problem. Basic Level:
1) Calculating EAR: First National bank charges 14.2% compounded monthly on its business loans. First United Bank charges 14.5% compounded semiannually. As a potential borrower, which bank would you go to for a new loan?
2) Ackerman Co. has 9% coupon bonds on the market with nine years left to maturity. The bond makes annual payments. If the bond currently sells for $934, what is its YTM?
Answer the two questions:
Intermediate level:
1) Non constant Dividends: Far side Corporation is expected to pay the following dividends over the next four years: $11, $8, $5 and $2. Afterward, the Company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 12%, what is the current share price?
2) Arithmetic and Geometric returns: A stock has had the following year-end prices and dividends:
|
Years
|
Price
|
Dividend
|
|
1
|
$60.18
|
$0.00
|
|
2
|
$73.66
|
$0.60
|
|
3
|
$94.18
|
$0.64
|
|
4
|
$89.35
|
$0.72
|
|
5
|
$78.49
|
$0.80
|
|
6
|
$95.05
|
$1.20
|
What are arithmetic and geometric returns for the stock?
Answer any one question:
Difficult level:
1) Find the WACC:
Debt: 8,000, 6.5% coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 92% of par; the bonds make semi-annual payments.
Common stock: 250,000 shares outstanding, selling for $57 per share; the beta is 1.05
Preferred stock: 15,000 shares of 5% preferred stock outstanding, currently selling for $93 per share.
Market: 8% market risk premium and 4.5% risk-free rate.
2) Stock splits and Stock Dividends: Red Rocks Corporation (RRC) currently has 350,000 shares of stock outstanding that sell for $90 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:
a) RRC has five-for-three stock split?
b) RRC has 15% stock dividend?
c) RRC has 42.5% stock dividend?
d) RRC has a four-for-seven reverse stock split?