FINANCIAL DECISIONS CHAPTER 5 AND 6 PRACTICE PROBLEMS

FINANCIAL DECISIONS CHAPTER 5 AND 6 PRACTICE PROBLEMS

1. What is the annual return for 2015 on Stock A?
2. Stock A

Stock price per share January 1, 2015:  $88.00

Annual Dividend:    $  2.30

Stock price per share December 31, 2015: $98.00What is the dividend yield on Stock A?

Annual stock return= (98-88)+2.30/88=13.98%

Dividend yield= $2.30/$98=2.34%

___________________________________________________________________________

1. What is the annual return for 2015 of Stock B?

Stock BStock price January 1, 2015:   $   920.00Quarterly dividend payment:   $     20.00 (must multiply by 4 to get annual dividend)Stock price December 31, 2015:   $1,100.00

($1100-$920)+ $80/$920=28.26%

___________________________________________________________________________

1. What is the annual return for 2015 of Stock C?

Stock C

Stock price per share January 1, 2015:  $  72.00

Annual Dividend:    $    3.20

Stock price per share December 31, 2015: $108.00

($108-$72)+$3.20/$72=54.44%

 

___________________________________________________________________________D.  What is the annual return for 2015 for Bond A?

Bond ABond price January 1, 2015:   $   950.00

Annual coupon payment:   $     60.00

Bond price December 31, 2015:   $1,050.00

($1050-$950)+$60/$950=16.84% ___________________________________________________________________________

2.  Please answer the questions below based on a corporate bond with the following characteristics:

Issuer:     Environmental Technologies Corporation

Standard and Poor rating: AA

Par value:   $100,000

Coupon rate:   7% per annum

Coupon payment:  Paid semiannually

Maturity date:   Ten years – December 31, 2026

1. A) What is the dollar amount of the coupon payment every six months? _ 0.07*$100,000/2= $3500
2. B) Is the coupon payment a fixed or variable rate? _it is a fixed rate.
3. C) Is this bond investment grade? (Yes or No)  _ Yes
4. D) what amount is Environmental Technologies Corporation promising to pay investors at maturity? _coupon payment would be 0.07*$100000= $7000 annually, and in 10 years, it would be $70,000 at maturity.
5. E) If you invested in this bond, are you permitted to sell it before maturity? (Yes or No)  Yes.
6. F) Environmental Technologies Corporation’s bond is not callable. If Conservation Services Corporation sold a bond that was like the Environmental Technologies Corporation bond in every respect, except that the Conservation Services Corporation bond had a call provision, which bond would need to offer investors a higher yield? ____conservation Services Corporation will offer higher yield because callable bonds carry higher yields to compensate

 

 

 

3.  Please answer the questions below based on a corporate bond with the following characteristics:

Issuer:     Bowie Corporation

Standard and Poor rating: BBB

Par value:   $75,000

Coupon rate:   9% per annum

Coupon payment:  Paid annually

Maturity date:   20 years – December 31, 2036

1. A) What is the dollar amount of the coupon payment every year? __0.09*$75,000= $6,750________
2. B) Is the coupon payment a fixed or variable rate? ____variable rateC) Is this bond investment grade? (Yes or No) ____No
3. D) What amount is Bowie promising to pay investors at maturity?  Annual payment is  $6,750 so for 20 years would be $6750*20= $135,000.

 

 

4. Scout Corp. needs to raise $50 million in an equity.

• Scout Corp.’s current stock price is $40.
• The underwriter, Morgan Stanley, advises underpricing the issue 5%.
• The underwriters require a spread of $1 per share.

1. How much will Scout Corp. net from each share?Underpricing by 5% price per share would be $38 per share, then subtract the underwriters spread of $1 =$37 dollars.

• ________________________________________________________________________

1. How many shares must the Scout Corp. sell to raise the needed $50 million?$50,000,000/$37=1,315,352 shares

• ________________________________________________________________________

 

5. Dynamic Drilling Corporation needs to raise $180 million in an equity issue.

• Its current stock price is $200.
• The underwriter, Goldman Sachs, advises underpricing the issue 4%.
• The underwriters require a spread of $3 per share.

1. How much will Dynamic Drilling Corporation net from each share?96% of 200= $192 then less underwriters spread of $ per share, the net share would be $189

• ________________________________________________________________________

1. How many shares must the Dynamic Drilling Corporationsell?

• $180,000,000/$189=952,381 shares________________________________________________________________________
• ________________________________________________________________________

 

1. What will Goldman Sachs earn on this issue?

It will earn capital through the sale of shares that it can use in its development and growth projects.

_______________________________________________________________________