Business Finance Week 3 Assignment

Submit one Excel spreadsheet per week, on one tab (no multiple tabs). Number each problem and leave a color highlighted space in between each problem.

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Chapter 6 Problems: 
•EP 6-2 (p. 189)
6-2 REAL RISK-FREE RATE You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.5%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:

• Inflation premium = 3.25%

• Liquidity premium = 0.6%

• Maturity risk premium = 1.8%

• Default risk premium = 2.15%

On the basis of these data, what is the real risk-free rate of return?

• EP 6-5 (p. 189)
6-5 MATURITY RISK PREMIUM The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.2%. What is the maturity risk premium for the 2-year security?

Chapter 7 Problems: 
•EP 7-1 (p. 224)
7-1 BOND VALUATION Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 8%, and the yield to maturity is 9%. What is the bond's current market price?

• IP 7-14 (p. 226)
7-14 EXPECTED INTEREST RATE Lloyd Corporation's 14% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 30 years, are callable 5 years from today at $1,050. They sell at a price of $1,353.54, and the yield curve is flat. Assume that interest rates are expected to remain at their current level.

a. What is the best estimate of these bonds’ remaining life?

b. If Lloyd plans to raise additional capital and wants to use debt financing, what coupon rate would it have to set in order to issue new bonds at par?


Chapter 8 Problems: 
•EP 8-1 (p. 262)


8-1 EXPECTED RETURN A stock's returns have the following distribution:

Demand for the Company's Products

Probability of This Demand Occurring

Rate of Return If This Demand Occurs

Weak

0.1

(50%)

Below average

0.2

(5)

Average

0.4

16

Above average

0.2

25

Strong

0.1

60

 

1.0

 

Calculate the stock's expected return, standard deviation, and coefficient of variation.



• CP 8-15 (p. 263)

8-15 CAPM AND REQUIRED RETURN HR Industries (HRI) has a beta of 1.8, while LR Industries’ (LRI) beta is 0.6. The risk-free rate is 6%, and the required rate of return on an average stock is 13%. The expected rate of inflation built into rRF falls by 1.5 percentage points, the real risk-free rate remains constant, the required return on the market falls to 10.5%, and all betas remain constant. After all of these changes, what will be the difference in the required returns for HRI and LRI?


Chapter 9 Problems: 
•EP 9-6 (p. 295)

9-6 PREFERRED STOCK VALUATION Fee Founders has perpetual preferred stock outstanding that sells for $60 a share and pays a dividend of $5 at the end of each year. What is the required rate of return?



• IP 9-9 (p. 295)
9-9 PREFERRED STOCK RETURNS Bruner Aeronautics has perpetual preferred stock outstanding with a par value of $100. The stock pays a quarterly dividend of $2, and its current price is $80.

a. What is its nominal annual rate of return?

b. What is its effective annual rate of return? (Brigham 325)




Chapter 6 Problems: 
•EP 6-2 (p. 189)
• EP 6-5 (p. 189)

Chapter 7 Problems: 
•EP 7-1 (p. 224)
• IP 7-14 (p. 226)

Chapter 8 Problems: 
•EP 8-1 (p. 262)
• CP 8-15 (p. 263)

Chapter 9 Problems: 
•EP 9-6 (p. 295)
• IP 9-9 (p. 295)