# f

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

 Determine the current market prices of the following \$1,000 bonds if the comparable rate is 10% and answer the questions. 1.  XY 5 ¼ percent, with interest paid annually for 20 years. 2. AB 14 percent, with interest paid annually for 20 years. a. Which bond has a current yield that exceeds the yield to maturity? b. Which bond may you expect to be called? Why? c. If CD, Inc. has a bond with a 5 ¼ percent coupon and a maturity of 20 years but which was lower rated, what would be its price relative to the XY, Inc. bond? Explain.

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?