You have contracted to buy a house for $521,250, paying $104,250 as a down payme

Question

You have contracted to buy a house for $521,250, paying $104,250 as a down payment and taking a fully amortizing mortgage for the balance at a 4.25% annual interest rate for 30 years. What will your monthly payment (covering principal and interest) be if you make monthly installments over the next 30 years (round to the nearest dollar) 2041 2051 2061 2071 What is the market rate of return if Milanese Inc.'s cost of equity is 13.246% and the company has a beta coefficient of 1.37%. The expected risk-free return is 5.3%. 12.2% 11.6% 11.1% 10.7% Five years ago Constellation, Inc., sold an issue of 20-year $1000 par bonds to finance a new distribution terminal. The bonds pay 7.0% interest, semi-annually. Today's required rate of return for similarly rated bonds is 5.7%. How much should these bonds sell for today? (Round off to the nearest $1.) 782 862 1130 1160 HiFli Corp. plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred stock, and 50 percent common stock and retained earnings far into the future. The required rate of return on each component is debt: 8.7 per cent; preferred stock: 11 per cent; common stock and retained earnings: 14 per cent. Assuming a 40 percent marginal tax rate, what is the minimum after-tax rate of return that Action must earn on its investments? 6.95 9.85 10.19 11.00

Explanation / Answer

2. Principle amount of loan = 521250 - 104250 = 417000
Annual interest rate = 4.25%, so monthly interest rate = 4.25%/12
Maturity = 30 years = 30 * 12 = 360 months
Monthly payment can be calculated in an excel as follows
Monthly payment =PMT(4.25%/12,360,-417000,0,0) = $2,051.39 per month
Cash inflow and outflow are denoted with opposite signs

3. Expected return can be calculated using CAPM as follows
Expected return = Risk free return + Beta (Market return - Risk free return)
13.246% = 5.3% + 1.37 * (Market return - 5.3%)
7.95% = 1.37 * Market return - 7.26%
Market return = 15.21% / 1.37 = 11.1%

4. Coupon rate = 7%
Semi annual payments
maturity is 20 years, but from today it is 15 years
par value = 1000
YTM = 5.7%
Price of the bond can be calculated as follows
Price =PRICE(A1,A2,7%,5.7%,100,2) = 112.99
Here A1 and A2 cells contain today's date and date of maturity which is 15 years from today
So for a $100 face value bond, price = 112.99
for a $1000 face value, price = 1129.9 which is 1030

5. Required return on the company = Sum of (Weight of security * Return required on security)
Required return on the company = 40% * 8.7% * (1-40%) + 10% * 11% + 50% * 14% = 10.19%

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