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/1 a) Compute the price ofa bond with SI000face value, 8% coupon rate, and 10 ye

ID: 2756719 • Letter: #

Question

/1 a) Compute the price ofa bond with SI000face value, 8% coupon rate, and 10 years to maturity when the required rate of return is 12%.[ Price = PMT x PVAFr," + FV x PVF, n] b) What is its yield-to-maturity if the bond is now selling at $1,000? 2. BSI will pay a common stock dividend of $3.30 (Di) at the end of the year. The required rate of retum on the stock is 15% and the dividend will grow at a constant rate of 5%. Compute: a) the stock price [P·D/(r-g), b) required rate of return when its price is 30 [r (D/P) + gl. c) the cost of capital (koe) when new stock is selling for $35 and flotation cost (F) is 10%, the constant growthrate is 5%.(knew-(D/P(1-F))+g). Given investors' required rate of return (ra) on a bond is 10%. Compute the cost of capital (kd) when the firm is 3. subject to 40% tax rate (T) and flotation cost (F) is 5%. Use k x (I- Ty(I-F)]. 4. Capital Cost (k) Weight (w) 6% 10% 20% .3 .1 .6 Given the capital structure, compute: a) the WACC (kw) correctly, [k.- (k, x w), b) if each capital is given equal weights, ie.,1/3 each. Bond Preferred Common 5. Given the cash flow of a project below: Years 1-10 Year 0 ($5,019) $1,000 a) Compute NPV = [PV ofbenefit-PV of cost] when the cost of capital (k) is 12%, b) find IRR using the equation [PV of cost-PMT x PVAFUJ. c) would you accept the project? Why or why not? The following is the cash flow from investment in a permanent working capital Year 0 Years 1-o ($6,000)$480 6. Compute: a) NPV when cost of capital (r) is 7% (PV = PMT/r), b) IRR (r) . PMT/PV), e) net annual benefit (annual benefit- annual cost).

Explanation / Answer

Answer 1

price => 80* 5.65 + 1000 * 0.322

Price => $774

YTM => [ 80 + ( 1000 - 774)/10] / [ ( 1000 + 774) /2]

=> (102.6/887)*100

YTM => 11.57%

Answer 2

a

stock price => 3.30 / (15%-5%)

Stock Price => $33

b

Required Rate of return => (3.30 /33) +0.5

Required Rate of return => 16%

c

Cost of capital => [ 3.3 /35(1-10%) ] + 0.05

Cost of capital => 15.47%

Answer 3

Cost of Capital => [10%( 1 - 40%) ]/ ( 1-5%)

Cost of Capital => 6.32%

Answer 4

a

WACC => [(0.06 *0.3) + (0.10 *0.1) + (0.20 * 0.6) ] *100

WACC => 14.8%

b

WACC => [(0.06 *0.33) + (0.10 *0.33) + (0.20 * 0.34) ] *100

WACC => 12.08%

Answer 5

NPV => ( 1000 * 5.65 ) - 5019

NPV => $ 631

IRR => 5019 = 1000* PVAF(r,10)

IRR => 15%

c

We should accept the project becaue NPV is possitive and even IRR is greater than cost of capital hence it is profitable to accept the project.

Answer 6

a

Present value => 480 / 7%

Present Avlue => $6857

b

IRR => 480 / 6857

IRR => 7%