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Financial Management Assignment for study group-1 Q.

1 A 10-year, 12 percent semiannual coupon bond, with a par value of $1,000, May be called in 4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been issued.) a. What is the bonds yield to maturity? b. What is the bonds current yield? c. What is the bonds capital gain or loss yield? d. What is the bonds yield to call?

Q.2 Why does capital budgeting forms a crucial part of Financial management? Can a misguided capital budgeting be a life threatening decision to a company?

Financial Management Assignment for study group-2 Q. 1 Why is sales forecasting a crucial aspect of the capital budgeting? Kindly illustrate. Q.2 Look up the prices of American Telephone & Telegraphs (AT&T) bonds in The Wall Street Journal (or some other newspaper that provides this information). a. If AT&T were to sell a new issue of $1,000 par value long-term bonds, approximately what coupon interest rate would it have to set on the bonds if it wanted to bring them out at par? b. If you had $10,000 and wanted to invest it in AT&T, what return would you expect to get if you bought AT&Ts bonds? Financial Management Assignment for study group-3 Q.1 Capital Budgeting deals with the funds flow, but project classification forms the basis of the capital budgeting decision, why so? Also explain the major project categories and their usage. Q.1 An investor has two bonds in his portfolio. Each bond matures in 4

years, has a face value of $1,000, and has a yield to maturity equal to 9.6 percent. One bond, Bond C, pays an annual coupon of 10 percent; the other bond, Bond Z, is a zero coupon bond. a. Assuming that the yield to maturity of each bond remains at 9.6 percent over the next 4 years, what will be the price of each of the bonds at the following time periods? Fill in the following table:

b. Plot the time path of the prices for each of the two bonds. Financial Management Assignment for study group-4 Q.1 It is now January 1, 2002, and you are considering the purchase of an outstanding Racette Corporation bond that was issued on January 1, 2000. The Racette bond has a 9.5 percent annual coupon and a 30year original maturity (it matures on December 31, 2029). There is a 5-year call protection (until December 31, 2004), after which time the bond can be called at 109 (that is, at 109 percent of par, or $1,090). Interest rates have declined since the bond was issued, and the bond is now selling at 116.575 percent of par, or $1,165.75. You want to determine both the yield to maturity and the yield to call for this bond. (Note: The yield to call considers the effect of a call provision on the bonds probable yield. In the calculation, we assume that the bond will be outstanding until the call date, at which time it will be called. Thus, the investor will have received interest payments for the call-protected period and then will receive the call pricein this case, $1,090on the call date.) a. What is the yield to maturity in 2002 for the Racette bond? What is its yield to call? b. If you bought this bond, which return do you think you would actually earn? Explain your reasoning. c. Suppose the bond had sold at a discount. Would the yield to

maturity or the yield to call have been more relevant? Q.2 What decision as a finance profession would you take when NPV and IRR gives in contradictory results in case of mutually exclusive projects? Please justify you decision. Financial Management Assignment for study group-5 Q.1 A bond trader purchased each of the following bonds at a yield to maturity of 8 percent. Immediately after she purchased the bonds interest rates fell to 7 percent. What is the percentage change in the price of each bond after the decline in interest rates? Fill in the following table:

Q.2 a. What do you understand by crossover rate? Does it affect the decision in case of mutually exclusive projects? Please support you answer. b. Should capital budgeting decision be dependent solely on the NPV method? Please support your answer. Financial Management Assignment for study group-6 Q.1Snyder Computer Chips Inc. is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15 percent during the next 2 years, at 13 percent in the third year, and at a constant rate of 6 percent thereafter. Snyders last dividend was $1.15, and the required rate of return on the stock is 12 percent. a. Calculate the value of the stock today. b. Calculate P1 and P2. c. Calculate the dividend yield and capital gains yield for Years 1, 2 & 3.

Q.2 Can Capital Budgeting Technique be used in other contexts such as downsizing personnel or sale of an asset or division. Please support your answer. Financial Management Assignment for study group-7 Q.1 Warr Corporation just paid a dividend of $1.50 a share The dividend is expected to grow 5 percent a year for the next 3 years, and then 10 percent a year thereafter. What is the expected dividend per share for each of the next 5 years?

Q.2 HookIndustries has a capital structure that consists solely of debt and common equity. The company can issue debt at 11 percent. Its stock currently pays a $2 dividend per share (D0 _ $2), and the stocks price is currently $24.75. The companys dividend is expected to grow at a constant rate of 7 percent per year; its tax rate is 35 percent; and the company estimates that its WACC is 13.95 percent. What percentage of the companys capital structure consists of debt financing? Financial Management Assignment for study group-8 Q.1 A stock is trading at $80 per share. The stock is expected to have a year-end dividend of $4 per share (D1 _ $4.00), which is expected to grow at some constant rate g throughout time. The stocks required rate of return is 14 percent. If you are an analyst who believes in efficient markets, what would be your forecast of g? Q.2 a. Capital budgeting decision and security valuation are similar to an extent. Comment. b. Compare both capital budgeting and security valuation process in detail. Financial Management Assignment for study group-9 Q.1 The earnings, dividends, and stock price of Carpetto Technologies Inc. are expected t grow at 7 percent per year in the future. Carpettos common stock sells for $23 per share, its last dividend was $2.00, and the company will pay a dividend of $2.14 at the end of the current year. a. Using the discounted cash flow approach, what is its cost of common equity? b. If the firms beta is 1.6, the risk-free rate is 9 percent, and the

average return on the market is 13 percent, what will be the firms cost of common equity using the CAPM approach? c. If the firms bonds earn a return of 12 percent, what will ks be using the bond-yield plus- risk-premium approach? (Hint: Use the midpoint of the risk premium range.) d. On the basis of the results obtained in parts a through c, what would you estimate Carpettos cost of common equity to be? Q.2 Martell Mining Companys ore reserves are being depleted, so its sales are falling. Also, its pit is getting deeper each year, so its costs are rising. As a result, the companys earnings and dividends are declining at the constant rate of 5 percent per year. If D0 = $5 and ks = 15%, what is the value of Martell Minings stock? Financial Management Assignment for study group-10 Q.1 Midwest Electric Company (MEC) uses only debt and equity. It can borrow unlimited amounts at an interest rate of 10 percent as long as it finances at its target capital structure, which calls for 45 percent debt and 55 percent common equity. Its last dividend was $2, its expected constant growth rate is 4 percent, and its stock sells at a price of $20. MECs tax rate is 40 percent. Two projects are available: Project A has a rate of return of 13 percent, while Project B has a rate of return of 10 percent. All of the companys potential projects are equally risky and as risky as the firms other assets. a. What is MECs cost of common equity? b. What is MECs WACC? c. Which projects should MEC select? Q.2 Microtech Corporation is expanding rapidly, and it currently needs to retain all of its earnings, hence it does not pay any dividends. However, investors expect Microtech to begin paying dividends, with the first dividend of $1.00 coming 3 years from today. The dividend should grow rapidlyat a rate of 50 percent per year during Years 4 and 5. After Year 5, the company should grow at a constant rate of 8 percent per year. If the required return on the stock is 15 percent, what is the value of the stock today?