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I.
Listed below is the current data for ABC Company: | ||||
ABC Company Balance Sheet | ||||
December 31, 20xx | ||||
Assets | Liabilities and Equity | |||
Cash | $10,000,000 | Accounts Payable | $20,000,000 | |
Accounts Receivable | 250,000,000 | Long-term debt | 400,000,000 | |
Inventory | 120,000,000 | Common Stock ($10 par, 1,000,000 outstanding) | 10,000,000 | |
Plant and Equipment | 325,000,000 | Paid-in capital | 90,000,000 | |
Retained Earnings | 185,000,000 | |||
Total | $705,000,000 | Total | $705,000,000 | |
Construct a balance sheet after a $3 per share cash dividend. What is the total cash dividend? |
II.
What is the value of a common stock if: | ||||||||
a. the firm’s earnings and dividends are growing annually at 10 percent, the current dividend is $1.32, and investors require a 15 percent return on investments in common stock? What is the rate of return if the price of the market price of the stock is $35? in common stock? What is the rate of return if the price of the market price of the stock is $35? | ||||||||
b. you add risk to the analysis in Part a. and the firm’s beta coefficient is 0.8, the risk-free rate is 9 percent, and the return on the market is 15 percent? | ||||||||
What is the risk-adjusted return? Should the investor acquire the stock? Why or why not |
III.
A firm has the following preferred stocks outstanding: |
PFD A: $40 annual dividend; $1,000 par value; no maturity |
PFD B: $95 annual dividend; $1,000 par value; maturity after twenty-five years |
If comparable yields are 9 percent, what should be the price of each preferred stock? |
IV
A bond has the following terms: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Principal amount | $1,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Semi-annual interest | $50 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Maturity | 10 years | |||||||||||||||||||||||||||||||||||||||||||||||||||
(When asked for a % yield, round yields to nearest tenth of a percent, such as 10.1 %.) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
a. What is the bond’s price if comparable debt yields 12%? | ||||||||||||||||||||||||||||||||||||||||||||||||||||
b. What would be the price if comparable debt yields 12% and the bond matures after 5 years? | ||||||||||||||||||||||||||||||||||||||||||||||||||||
c. What are the current yields and yields to maturity if a. and b.? | ||||||||||||||||||||||||||||||||||||||||||||||||||||
d. What would be the bond’s price in a. if interest rates declined to 8%? What if the bond matures after 5 years? | ||||||||||||||||||||||||||||||||||||||||||||||||||||
e. What are the current yields and yields to maturity in d.? | ||||||||||||||||||||||||||||||||||||||||||||||||||||
f. What two generalizations may be drawn from the above price changes? | ||||||||||||||||||||||||||||||||||||||||||||||||||||
V
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VI
Given the information below, answer the following questions. | ||
A convertible bond has the following features: | ||
Principal | $1,000 | |
Maturity date | 20 years | |
Interest | $80 (8% coupon) paid yearly | |
Call price | $1,050 | |
Exercise price | $65 a share | |
a. The bond may be converted into how many shares? | ||
b. If comparable non-convertible debt offered an annual yield of 12 percent, what would be the value of this bond as debt? | ||
c. If the stock were selling for $52, what is the value of the bond in terms of stock? | ||
d. Would you expect the bond to sell for its value as debt (i.e., the value determined in b) if the price of the stock were $52? | ||
e. If the price of the stock were $35, what would be the minimum price of the bond? | ||
f. What is the probability that the bond will be called when the price of the stock is $52? | ||
g. If the price of the stock rose to $73, what would happen to the price of the bond? | ||
h. If the price of the stock were $73, what would the investor receive if the bond were called? |