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Surname 1

Assessment 4

Name

Professor

Course

Date

Beta of stock-D

= 1.05

= 0.124 or 12.4%
Surname 2

Stock R is expected to return

6% +1.5x (14%-6%)

=18%

Stock S is expected to return

6%+0.75x (14%-6%)

= 12%

=6%

Problem 3: CAPM and Required Return

Nominal Rf=2%+3%=5%

use CAPM approach

required return=5%+1.7*6%=15.2%

Problem 4: Bond Valuation

Price of both bond at three different market rate is calculated in excel and screen shot

provided below:
Surname 3

b.

There is direct relationship between Bond interest rate, risk and maturity of bond. For

long maturity bond the probability of interest rate risk is higher than for short term bond. So

interest rate risk for long term bond is higher than short term bond.

Lower period bond lower interest arte risk.

This is because fixed coupon rate. if interest rate fall for shorter period bond then its

effect on price of bond less than for longer period maturity bond.

Problem 5: Yield to Call

So, here the investor would have paid \$1000 five years back. He would have received

\$120 every year for 5 years. Yesterday, when the bonds were called, he would have received

Realized return = RATE (5, 120, -1000, 1080, 0) = 13.23%

Surname 4

Ideally, he would not be happy because he made an investment for 20 years at 12%.

Bonds are typically called in when the interest rates have declined and the firm could raise

money cheaply. Now, the investor needs to allocate his capital for another 15 years in a lower

=>

1)

=>

YTM = 13.80%

2)

80 * [1-(1+YTM) ^-5]/YTM + 1000/ (1+YTM) ^5 = 1200

YTM = 3.56%

Yes, i would pay 800 for each bond since at 12%, the price would be higher than 800

Problem 7: After-Tax Cost of Debt

The XYZ Inc.'s currently outstanding bonds have a 10 percent yield to maturity and an 8

percent coupon. It can issue new bonds at par that would provide a similar yield to maturity. If its

Surname 5

Problem 8: Present Value of an Annuity

Find the present values of the following ordinary annuities if discounting occurs once a

year:

Surname 6