BUSN 602 Week 4 Homework April2014
Question # 00026686
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Updated on: 09/25/2014 07:54 AM Due on: 09/25/2014
To complete the homework assignments in the templates provided:
1. The question is provided for each problem. You may need to refer to your textbook for additional information in
a few cases.
2. You will enter the required information into the shaded cells.
3. The cells are coded:
a) T requires a text answer. Essay questions require references; use the textbook.
b) C requires a calculation, using Excel formulas or functions. You cannot perform the operation on a calculator and then type the answer in the cell. You will enter the calculation in the cell, and only the final answer will show in the cell. I will be able to review your calculation and correct, if necessary.
c) F requires a number only. In some problems, a “Step 1” is added to help you solve the problem.
d) Formula requires a written formula, not the numbers. For example, the rate of return = [(1 + nominal)/ (1+inflation)]-1, or D (debt) + E (equity) = V (value).
4. Name your assignment file as "LastnameFirstinitial-BUSN602-Week#", and submit by midnight ET, Day
1. The question is provided for each problem. You may need to refer to your textbook for additional information in
a few cases.
2. You will enter the required information into the shaded cells.
3. The cells are coded:
a) T requires a text answer. Essay questions require references; use the textbook.
b) C requires a calculation, using Excel formulas or functions. You cannot perform the operation on a calculator and then type the answer in the cell. You will enter the calculation in the cell, and only the final answer will show in the cell. I will be able to review your calculation and correct, if necessary.
c) F requires a number only. In some problems, a “Step 1” is added to help you solve the problem.
d) Formula requires a written formula, not the numbers. For example, the rate of return = [(1 + nominal)/ (1+inflation)]-1, or D (debt) + E (equity) = V (value).
4. Name your assignment file as "LastnameFirstinitial-BUSN602-Week#", and submit by midnight ET, Day
7. Discussion Question 10-2
What are the major sources of long-term funds available to business corporations? Indicate their relative
importance.
Answer:
T
Discussion Question 10-8
Briefly describe the types of bonds that can be issued to provide bondholder security.
Answer:
T
Discussion Question 10-11
Why might a firm want to maintain a high bond rating? What has been happening to bond ratings in recent years?
Answer:
T
Exercise 10-1
Compute the annual interest payments and principal amount for a Treasury InflationProtected Security with a par value of $1,000 and a 3-percent interest rate if inflation is 4 percent in year 1, 5 percent in year 2, and 6 percent in year 3.
Answer:
Enter the answers in blue shaded cells
Par value
Interest rate
F
F
Year
Inflation
Par value
1
2
3
F
F
F
C
C
C
Annual coupon
interest
C
C
C
Exercise 10-4
Assume a $1,000 face value bond has a coupon rate of 8.5 percent paid semiannually and has an eight-year life. If investors are willing to accept a 10 percent rate of return on bonds of similar quality, what is the present value or worth of this bond?
Answer:
Step 1:
Coupon rate
Years to maturity
Number of coupon payments per year
Par value
Market rate
F
F
F
F
F
Step 2:
Compute periodic interest rate
Compute number of periods
Compute coupon cash flow
C
C
C
Step 3:
Bond price (use PV)
C
(APR)
Exercise 10-6
The Garcia Company’s bonds have a face value of $1,000, will mature in 10 years, and carry a coupon rate of 16 percent.
Assume interest payments are made semiannually.
a. Determine the present value of the bond’s cash flows if the required rate of return is 16 percent.
b. How would your answer change if the required rate of return is 12 percent?
Answers:
Enter the answers in blue shaded cells
Step 1:
Coupon Rate
Years to maturity
Number of coupon payments per year
Par Value
a. PV 16% rate of b. PV 12% rate of
return
return
F
F
F
F
F
F
F
F
Step 2:
Compute periodic interest rate
Compute number of periods
Compute coupon cash flow
C
C
C
C
C
C
Step 3:
Bond price (use PV)
C
C
Exercise 10-23
The Joseph Company has a stock issue that pays a fixed dividend of $3.00 per share annually. Investors believe the nominal risk-free rate is 4 percent and that this stock should have a risk premium of 6 percent. What should be the value of this stock?
Answer:
Enter the answers in blue shaded cells
Required return
C
Value of stock
What are the major sources of long-term funds available to business corporations? Indicate their relative
importance.
Answer:
T
Discussion Question 10-8
Briefly describe the types of bonds that can be issued to provide bondholder security.
Answer:
T
Discussion Question 10-11
Why might a firm want to maintain a high bond rating? What has been happening to bond ratings in recent years?
Answer:
T
Exercise 10-1
Compute the annual interest payments and principal amount for a Treasury InflationProtected Security with a par value of $1,000 and a 3-percent interest rate if inflation is 4 percent in year 1, 5 percent in year 2, and 6 percent in year 3.
Answer:
Enter the answers in blue shaded cells
Par value
Interest rate
F
F
Year
Inflation
Par value
1
2
3
F
F
F
C
C
C
Annual coupon
interest
C
C
C
Exercise 10-4
Assume a $1,000 face value bond has a coupon rate of 8.5 percent paid semiannually and has an eight-year life. If investors are willing to accept a 10 percent rate of return on bonds of similar quality, what is the present value or worth of this bond?
Answer:
Step 1:
Coupon rate
Years to maturity
Number of coupon payments per year
Par value
Market rate
F
F
F
F
F
Step 2:
Compute periodic interest rate
Compute number of periods
Compute coupon cash flow
C
C
C
Step 3:
Bond price (use PV)
C
(APR)
Exercise 10-6
The Garcia Company’s bonds have a face value of $1,000, will mature in 10 years, and carry a coupon rate of 16 percent.
Assume interest payments are made semiannually.
a. Determine the present value of the bond’s cash flows if the required rate of return is 16 percent.
b. How would your answer change if the required rate of return is 12 percent?
Answers:
Enter the answers in blue shaded cells
Step 1:
Coupon Rate
Years to maturity
Number of coupon payments per year
Par Value
a. PV 16% rate of b. PV 12% rate of
return
return
F
F
F
F
F
F
F
F
Step 2:
Compute periodic interest rate
Compute number of periods
Compute coupon cash flow
C
C
C
C
C
C
Step 3:
Bond price (use PV)
C
C
Exercise 10-23
The Joseph Company has a stock issue that pays a fixed dividend of $3.00 per share annually. Investors believe the nominal risk-free rate is 4 percent and that this stock should have a risk premium of 6 percent. What should be the value of this stock?
Answer:
Enter the answers in blue shaded cells
Required return
C
Value of stock
-
Rating:
/5
Solution: BUSN 602 Week 4 Homework April2014 Solution