CHAPTER 5 Solutions 1. Price the bonds from the above table with annual coupon payments.

(See table in book) Price = $1,1 !."# Price = $$%&.$# Price = $%,#&'. # Price = $1#,($#.(% (. Price the bonds from the above table with )uarterly coupon payments. (See table in book) Price = $1,1 !."# Price = $$%&.$# Price = $ , !#.(# Price = $1#,($#.(% *hat is the yield of the above bonds if interest (coupon) is paid annually+ (See table in book) ,-.S / 01. P2 P34 52 6P4 $.# 6P4 $."%1' 6P4 $.1! % 6P4 1(.'''1 *hat is the yield of the above bonds if interest (coupon) is paid )uarterly+ (See table in book) 6P4 $.# 6P4 $."1 # 6P4 $.1$($ 6P4 1(.''#' 7ow lon8 to maturity for the bonds listed below+ (See table in book) ,-.S / 01. P2 P34 6P4 '.'''& 6P4 (#.##1 6P4 !'.''%' 6P4 %#.###(

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3oore 6ompany is about to issue a bond with semi9annual coupon payments, a coupon rate of $:, and par value of $1,###. 4he yield9to9maturity for this bond is 1#:. a. *hat is the price of the bond if the bond matures in &, 1#, 1&, or "# years+ b. *hat do you notice about the price of the bond in relationship to the maturity of the bond+

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&.< 1#.< 1&.< "#.<

$'"".!$ $$!&.($ $$ %."$ $$"$. 1

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4he lon8er the maturity of a bond sellin8 at a discount, all else held constant, the lower the price of the bond>

;ddison 6ompany will issue a ?ero coupon bond this comin8 month. 4he pro@ected yield for the bond is !:. 0f the par value of the bond is $1,###, what is the price of the bond usin8 a semi9annual convention if a. 4he maturity is "# years+ $"&".&! b. 4he maturity is (# years+ $1"%.'( c. 4he maturity is &# years+ $(".#% d. 4he maturity is 1## years+ $1.#( *hat is the annual implied interest of a five year ?ero coupon bond (usin8 the semi9annual pricin8 convention) with a current yield of 1": and a par value of $1,###.##+ 4he first yearAs interest isB 4he second yearAs interest isB 4he third yearAs interest isB 4he fourth yearAs interest isB 4he fifth yearAs interest isB 4otal interest isB $%'.#" $!!.&& $$!.1( $'!.'1 $11#.## $ 1.%1

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4he Sunvold 3anufacturin8 6ompany makes basketball e)uipment. 4he company decides to issue a putable bond. 4he callable bond is eCpected to sell for $' # per bond. 0f the bond is a twenty year, semi9annual bond with a %: coupon rate and a current yield to maturity of !:, what is the cost of the option attached to the bond+ (;ssume $1### par value) Put Dption = $' #.## 9 $$'(."" = $ %.!$

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0n Problem 1$, the conversion option is for &# shares of Phillips 3anufacturin8 6ompany for every bond. 0f the current bond price is $1," #, at what share price would a bondholder be better off convertin8 to stock+ ;ny price aboveB $" .$#.

Chapter 6 Solutions

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;nderson 3otors, 0nc. has @ust set the company dividend policy at $#.&# per year. 4he company plans on bein8 in business forever. *hat is the price of this stock if a. ;n investor wants a &: return+ $1#.## b. ;n investor wants an $: return+ $%."& c. ;n investor wants a 1#: return+ $&.## d. ;n investor wants a 1(: return+ $(.$& e. ;n investor wants a "#: return+ $".&# =en9EaysAs 5ine 5oods has a current annual cash dividend policy of $"."&. 4he price of the stock is set to yield a 1": return. *hat is the price of this stock if the dividend will be paid forB a. 1# years+ $1".!1 b. 1& years+ $1&.(" c. # years+ $1$.& d. %# years+ $1$.!( e. 1## years+ $1$.!& f. 5orever+ $1$.!& ,in8 *aterbeds has an annual cash dividend policy that raises the dividend each year by :. Fast yearAs dividend was $#. # per share. *hat is the price of this stock if a. ;n investor wants a &: return+ $ 1.%# b. ;n investor wants an $: return+ $1#. # c. ;n investor wants a 1#: return+ $%.'( d. ;n investor wants a 1(: return+ $ .%" e. ;n investor wants a "#: return+ $".%#

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3iles 7ardware has an annual cash dividend policy that raises the dividend each year by (:. Fast yearAs dividend was $1.## per share. 0nvestors want a 1&: return on this stock. *hat is the price of this stock if a. 4he company will be in business for & years and not have a li)uidatin8 dividend+ $(.% b. 4he company will be in business for 1& years and not have a li)uidatin8 dividend+ $%.' c. 4he company will be in business for "& years and not have a li)uidatin8 dividend+ $$.#( d. 4he company will be in business for (& years and not have a li)uidatin8 dividend+ $$. # e. 4he company will be in business for !& years and not have a li)uidatin8 dividend+

$$.&$ f. 5orever+ $$.&$ '. <eitmer 5ashions eCpects the followin8 dividend pattern over the neCt seven yearsB .ear 1 $1.## .ear " $1.1# .ear ( $1."1 .ear $1.(( .ear & $1. % .ear % $1.%1 .ear ! $1.!!

4hen the company will have a constant dividend of $".## forever. *hat is the price of this stock today if an investor wants to earn a. 1&:+ $1#.$' b. "#:+ $!.$1 11. 7uber ;thletic 6lub is 8oin8 to offer preferred stock to its members with the followin8 characteristicsG par value is $1## and annual dividend rate of %:. 0f a member wants the followin8 returns, what price should he be willin8 to payB a. =rad wants a 1#: return. $%#.## b. 3ike wants a 1": return $&#.## c. <ick wants a 1&: return $ #.## d. Eulius wants a 1$: return $((.(( 3artin *inery wants to raise $1#,###,### from the sale of preferred stock. 0f the winery wants to sell 1,###,### shares of preferred stock what annual dividend will they have to promise if investors demand the followin8 returnB a. 1":. $1."# per year b. 1$:. $1.$# per year c. $:. $#.$# per year d. %:. $#.%# per year e. ':. $#.'# per year f. !:. $#.!# per year

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1&. Hsin8 .ahoo 5inance (httpB11finance.yahoo.com1) and ticker symbol P-P, find PepsiAs historical dividend payment and current price. 7istorical dividends are available in the historical price section. Hse the historical dividend payments to find the annual dividend 8rowth rate (if you have a )uarterly pattern be sure to annuali?e this )uarterly 8rowth rate). /ow find the re)uired rate of return for this stock, assumin8 that the future dividend 8rowth rate will remain the same and the company has an infinite hori?on. Ioes this return seem reasonable for Pepsi+ ;/S*-<B 5or this problem a nine year dividend history is used and the followin8 are the prior nine year dividends ad@usted for stock splits with a price on ;u8ust 1&, "##! of $%$.(#B

0n 1''! Pepsi had a special dividend of $(."# and this will cause problems in the 8eneral 8rowth rate of the dividends. 1''$ $#.&1& 1''' $#.&(& "### $#.&&& "##1 $#.&!& "##" $#.&'& "##( $#.%( "## $#.$& "##& $1.#1 "##% $1.1% #.1"&% or 1".&%: 4his looks like a reasonable re)uired return for a stock.

CHAPTER 7: SOLUTIONS 1. 6I Iollar <eturn = $ # Stock Iollar <eturn = $1( =ond Iollar <eturn = $"# =ike Iollar <eturn = 9$1$# (. 6I Percent <eturn = $.##: Stock Percent <eturn = &%.&": =ond Percent <eturn = 1.'": =ike Percent <eturn = 9 &.##: 7oldin8 Period <eturn = 1 ."': ;nnual <eturn = ($.!&: 7oldin8 Period <eturn for 4radin8 6ard = 1 ."': 7oldin8 Period <eturn for 6lassic 6ar = &$$." : 4radin8 6ar ;nnual <eturn = ($.!&: 6lassic 6ar ;nnual <eturn = (!.'": ;vera8e <eturn H.S. 4reasury =ill for '#sB &.#": ;vera8e <eturn H.S. Fon894erm Jovernment =onds for '#sB '."(: ;vera8e <eturn H.S. Far8e 6ompany Stocks for '#sB 1$.'': ;vera8e <eturn H.S. Small 6ompany Stocks for '#sB 1&.$!: 7i8hest was Far8e 6ompany Stocks, Fowest was ( 3onth 49=ills Standard Ieviation for H.S. 4reasury =ill for '#sB 1.(!: Standard Ieviation for H.S. Fon894erm Jovernment =onds for '#sB 1".($: Standard Ieviation for H.S. Far8e 6ompany Stocks for '#sB 1 ."1:

&. !.

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Standard Ieviation for H.S. Small 6ompany Stocks for '#sB "1.!$: 7i8hest was Small 6ompany Stocks, Fowest was ( 3onth 49=ills 1(. -Cpected <eturn Stock = (.(: -Cpected <eturn 6orp. =ond = &.": -Cpected <eturn Jov. =ond = .": -Cpected <eturn Stock = '. : -Cpected <eturn 6orp. =ond = %. : -Cpected <eturn Jov. =ond = &. : a.) -Cpected <eturn ; = .#: -Cpected <eturn = = or 11.": -Cpected <eturn 6 = 1%.%: 2ariance of ; = #.##: 2ariance of = = #.%1: 2ariance of 6 = (. 1: Standard Ieviation of ; = #.##: Standard Ieviation of = = !.$1: Standard Ieviation of = = 1$. %: -Cpected <eturn E = &.#: -Cpected <eturn , = 11.$#: -Cpected <eturn F = 1%."#: K" (E) = #.##: Standard Ieviation of E = #.##: K" (,) = 1.# : Standard Ieviation of , = 1#."": K" (F) = ".1&: Standard Ieviation of F = 1 .%&: -Cpected <eturn Portfolio = 1".$$: 2ariance of Portfolio = 1.1': Standard Ieviation of Portfolio = 1#.'#:

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b.) c.)

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a.)

b.)

c.) d.) "1.

-Cpected <eturn ;sset 3 = $: -Cpected <eturn Portfolio = $.%: 4he benefit is an increase in return of #.%: and a simultaneous reduction in total risk of 1:.

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=eta of Portfolio 1 = 1.# =eta of Portfolio " = #.$ &

=eta of Portfolio ( = 1.1 & "&. =eta of Portfolio 1 = 1.# =eta of Portfolio " = #.$'& =eta of Portfolio ( = 1.11& =eta of 1.# = $#: of wealth in risky portfolio and "#: of wealth in risk9free asset. =eta of #.!& = %#: of wealth in risky portfolio and #: of wealth in risk9free asset. =eta of #.&# = #: of wealth in risky portfolio and %#: of wealth in risk9free asset. =eta of #."& = "#: of wealth in risky portfolio and $#: of wealth in risk9 free asset. "'. Slope for ,S-; <adio = '. ": Slope for /* 3ed = '.(": *hile very close, the choice is ,S-; <adio based on the hi8her reward9to9risk ratio. (1. a.) b.) c.) =art should invest 11!th of his wealth in bonds and %1!th of his wealth in e)uity. =eta of =artAs portfolio = 1.1 Fisa should invest (1!th of her wealth in bonds and 1!th of her wealth in e)uity. =eta of FisaAs portfolio = #.' 3a88ie should invest &1!th of her wealth in bonds and "1!th of her wealth in e)uity. =eta of 3a88ieAs portfolio = #.!

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CHAPTER 8: SOLUTIONS 1. Payback Period for Pro@ect ;B " and L years, ;66-P4 Payback Period for Pro@ect =B ( and 11"# years, <-E-64 Payback Period for Pro@ect 6B ( years, ;66-P4 Payback Period for Pro@ect IB years, <-E-64 (. Solution at &: discount rate Pro@ect ;B $$'".'' and fully recovered Iiscounted Payback Period is ( years. Pro@ect =B $1",!#$.!$ and fully recovered Iiscounted Payback Period is years. Pro@ect 6B $11,$%#.#& and fully recovered Iiscounted Payback Period is years.

Pro@ect IB $(,1$#.(# and fully recovered. Iiscounted Payback Period is & years. Solution at 1#: discount rate Pro@ect ;B $",%$1. % and fully recovered Iiscounted Payback Period is years. Pro@ect =B $!,%#$. ( and fully recovered Iiscounted Payback Period is years. Pro@ect 6B $&1! .#! and fully recovered Iiscounted Payback Period is years. Pro@ect IB 9$%,% &.1# and never recovered. 0nitial cash outflow is never recovered. Solution at "#: discount rate Pro@ect ;B $(& .'( and fully recovered Iiscounted Payback Period is years. Pro@ect =B $1#, 1!.'% and fully recovered Iiscounted Payback Period is & years. Pro@ect 6B $''!."' and fully recovered Iiscounted Payback Period is & years. Pro@ect IB 9$"1,' &.!( and initial cost is never recovered. Iiscounted Payback Period is infinity. &. Payback = 9$1&,### M $&,### M $&,### M $&,### = # so the payback period is ( years and the pro@ect is a 8o> 6alculate the Iiscounted Payback Period for the pro@ect at any positive discount rate, say 1:... Iiscounted Payback = 9$"'&.# so the payback period is over ( years and the pro@ect is a no98o>

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a.) b.) c.)

/P2 = $&',$&'.'$ /P2 = $"",$ #.(1 /P2 = 9$!,'('.$"

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<ankin8 order based on /P2sB Pro@ect / N /P2 of $(((,!'#.!! Pro@ect D N /P2 of $1'!,1"%.&( Pro@ect 3 N /P2 of $1% ,!($.( Pro@ect P N /P2 of 9$"1', 1(.'$ 0<<s (hintB use a calculator or spreadsheet) Pro@ect / N 1&." : Pro@ect D N "#."!:

11.

Pro@ect 3 N !.'(: Pro@ect P N 1!.!": 1(. <oss is partially ri8ht as /P2 and 0<< both re@ect or both accept the same pro@ects under the followin8 conditionsB O 4he pro@ects have standard cash flows O 4he hurdle rate for 0<< is the same as the discount rate for /P2 O ;ll pro@ects are available for acceptance re8ardless of the decision made on another pro@ect (pro@ects are not mutually eCclusive) 1&. Pro@ect HAs P0 = 1.#$" accept pro@ect. Pro@ect 2As P0 = #.'((& and re@ect pro@ect. Pro@ect *As P0 = #.'1&& and re@ect pro@ect. Pro@ect PAs P0 = 1.#1!& and accept pro@ect. Payback PeriodB !.% years and pro@ect is re@ected with siC year cut9off. /et Present 2alueB /P2 = 9$",1%1,%&%."& and re@ect pro@ect under /P2 rules. 0<<B 0<< = (.1'&&: and re@ect pro@ect as 0<< is less than 1": Profitability 0ndeC = #.$# ' and re@ect. 1'. /P2 (discount rate = #) = $1"#,### (y9aCis intercept) 0<< = 1 .!!:

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CHAPTER : SOLUTIONS 1. a.) 6ash, ;ccounts <eceivable, 0nventory, and ;ccounts Payable b.) "##( /et *orkin8 6apital = $!,!$# "## /et *orkin8 6apital = $!,!&# c.) Iecrease in /et *orkin8 6apital of $(#. (. &. Dperatin8 6ash 5low = $'$,###,### (Partial summary of answers needed) /et 0ncome = $ &,### "##( <etained -arnin8s = $ !,### "## ;ccumulated Iepreciation = $1$$,### "## <etained -arnin8s = $%",### Iecrease in Fon894erm Iebt "## = $"$,###

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6ash 5low to 6reditors for "## = $ %,### '. 11. $"%,### Q $ %,### 9 $"#,### -rosion 6ost = $&"#,### /et ;nnual 6ash 5low with one bikeB $",%##,### /et ;nnual 6ash 5low with two bikesB $",%$#,### (5irst line of table needed) Anti!ipate" (onth CO)S Eanuary $1#,### a.) b.) #e$% In*entor+ "##,### En"% In*entor+ ""#,### &or'in$ Cap% In!rease $1##.##

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;nnual depreciation = $&,$## Iepreciation schedule usin8 3;6<SG .ear Dne Iepreciation = $&,$## .ear 4wo Iepreciation = $',"$# .ear 4hree Iepreciation = $&,&%$ .ear 5our Iepreciation = $(,( #.$# .ear 5ive Iepreciation = $(,( #.$# .ear SiC Iepreciation = $1,%!#. # ;fter 4aC 6ash 5low = $1(,##&.%# ;fter 4aC 6ash 5low = $',&#&.%# ;fter 4aC 6ash 5low = $%,##&.%#

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a.) b.) c.)

1'. Dperatin8 6ash 5lows

0n thousands (rounded) .ear 1 .ear " .ear ( $1,"'# $1, ( $1,"$#

.ear $1,1$$

.ear & $1,1$$

;fter9taC cash flow on disposal = $ 1',1"#. 0ncremental 6ash 5lows for Pro@ect (;nswer in 4housands, $###) .ear # .ear 1 .ear " .ear ( .ear 4otal 6ash 5lows 9$ ,%## $1,"'# $1, ( $1,"$# $1,11$ (0ncremental) /P2 R 1": = $&"',"#' .ear & $",1(!