001 Fall 2017 rate and a face value of S1000. If the current price of the bond i
ID: 2806830 • Letter: 0
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001 Fall 2017 rate and a face value of S1000. If the current price of the bond is $878.31, calcu face value A four-year bond has an 8% coupon of the bond (assuming annual interest payments). he yield to maturity 8% b.10% c.12% is defined as the financing decision of the firm. Capital structure is divided between: a. Between equity holders and debt holders. b. Real assets and financial assets c. Debtholders and creditors 21. Capital structure 22. R Technology Corporation will generate Free Cash Flows (FCF) o: year 1-S1; year 2- $2; and year 3 -$4 (the are in millions ofdollar). The FCF are expected to grow 5% per year thereafter. IfR Technology's wACC iss% the enterprise value of the company in millions of dollars. a. $32.63 b. $35.26 c. $40.00 Use the following for questions 23 through 25: E (R) 20% SML 5% 1.5B What is the Expected Return for a security with a Beta of 1.25? a. b. c. 20.00% 15.00% 17.50% there were an asset with beta of 1.5, at what expected return would you consider the asset undervalued? a. b. c. 20.00% 18.00% 22.00% ou had a stock with a Beta of 1.5 and it paid you a $3 in dividends, and you expected the price to be $81 in ld you pay for the stock today? a. $84.00 b. $100.80 c. $70.00Explanation / Answer
Question 23 - 25
23.
Risk free rate = 5%
at beta of 1.50 required rate of return is 20%
So risk premium = (20% - 5%) /1 .50
= 15% / 1.50
= 10%
Risk premium of company is 10%.
Expected return at beta of 1.25 = 5% + (10% × 1.25)
= 5% + 12.50%
= 17.50%
Expected return at beta of 1.25 is 17.50%.
Option (C) is correct answer.
24.
Stock is considered as undervalued when expected return is more than required rate of return. at beta of 1.50, required rate of return is 20%. So, an expected return of 22%, stock is considered as undervalued.
Option (C) is correct answer.
25.
Required rate of return at 1.50 beta is 20%.
Stock price today = ($81 + $3) / (1 + 20%)
= $84 / 1.20
= $70.
Stock price today is $70.
Option (C) is correct answer.
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