Corporate Exam

Answers to 3220 Practice Midterm 2 Au2012

1. 2.7025 I

18 N

30.728 PMT

1000 FV

CPT PV = -1052

2. a. the bond is sold at par because when the investor goes to sell it, the coupon rate = current yield which also means that the yield to maturity is the same as the coupon rate and current yield..

3. D1 = 2.35

D2 = 2.90

D3 = 3.40

D4 = 3.40(1.05) = 3.57

P3 = D4/(r-g) = 3.57/(.13-.05) = 44.625

P0 = 2.35/1.13 + 2.90/(1.13)2 + 3.40/(1.13)3 + 44.625/(1.13)3

P0 = 2.08 + 2.27 + 2.36 + 30.93 = $37.64

4. c. same risk means same expected return

5. 1000 FV

-500 PV

5 N

0 PMT

CPT I = 14.87%

1000 FV

2 N

0 PMT

14.87 I

CPT PV = -758

6. E0 = 9.20 g = 4.5% div. payout = 1-b = .4

R = 10%

D0 = E0(1-b) = 9.20(.4) = 3.68

P0 = D0(1+g)/(r-g) = 3.68(1.045)/(.1-.045) = $69.92

7. the coupon rate is unaffected by changes in market yields so it will remain at 7%

8. 14 N

1000 FV

33.25 PMT

3.45 I

CPT PV = -986

9. coupon rate = current yield = YTM, Bond price = par

coupon rate < current yield < YTM, Bond price < par discount bond

coupon rate > current yield > YTM, Bond price > par premium bond

10. Discounting MIRR – discount all negative cf to time 0 and leave positive cf alone and calculate IRR

-3/(1.08)4 = -2.205 add to cf at time 0 to get -5.205

Calculate IRR CF0 -5.205

CF1 2.2

F01 3

IRR CPT = 12.88%

Compounding MIRR – compound all cf to the final period, leaving the initial cf alone and calculate IRR

2.2(1.08)1 = 2.376

2.2(1.08)2 = 2.566

2.2(1.08)3 = 2.771

Add all cf in year 4 together = 2.376 + 2.566 + 2.771 – 3 = 4.713

4.713 FV

0 PMT

4 N

-3 PV

CPT I = 11.96%

Difference between two MIRR = 12.88% - 11.96% = .92%

11. Revenue 412,000

Cash exp 206,000

Depreciation 75,000

EBIT 131,000

Taxes (.3) 39,300

Net Income 91,700

+ deprec. 75,000

OCF 166,700

-add’l AR 30,000

-add’l WC 15,000...