1. Mega Industries Corporation has eighteen years of a bond outstanding to maturity, an 8.25% nominal coupon, with semiannual payments. The bond has a 6.50% nominal yield to maturity, and can be called at a price of $1,120.
a. What is the bond”s nominal yield to maturity when called?
b. What is the bonds effective yield? If inflation rate is at 2.95% what is the real rate of return?
2. Copper Corporation”s Class Semi bonds have a twelve-year maturity and an 8.75% coupon paid semiannually and those bonds sell at their par value. The firm”s Class A bonds have the same risk, maturity, nominal interest rate, and par value, but these bonds pay interest annually. Neither bond is callable.
a. At what price should the bond sell for?
b. Does this bond sell at a discount or premium and why?
3. Flagship Corporation is looking to raise capital by issuing some 26-year bonds. The yield on the bonds is 7.34 percent. The bonds sell 96.75 percent of par value.
a. What is the current yield on these bonds?
b. What is the effective yield on the bonds?
c. What is the Yield to Maturity? What type of bond is this, discount or premium?
4. Big Corporation just paid a dividend of $1.55 per share. The dividends are expected to grow at 28 percent for the next five years and then 14% for two years then level off to a 6 percent growth rate indefinitely. Market value of stock is 45.80 and purchase price was 24.25.

a. What is the price of this stock today given a required return of 15 percent?
b. What is the stock target price at year 7? If you owned the stock would you sell it? Why?
c. If you are looking to buy the stock would you and why?
d. What would be the dividend yield and capital gains yield at year 7?

5. Highlight Corporation recently paid a dividend of $2.10 per share. The company will increase its dividend by 8 percent over next two years and will then reduce its dividend growth rate by 2 percentage points per year for two years until it reaches the industry average of 2 percent dividend growth, after which the company will keep a constant growth rate forever.
You had bought the stock for $57.30 and its market value is $55.

a. What is the price of this stock today given a required return of 11 percent?
b. What is the stock price at year 4? What is the dividend yield at year 4?
c. Would you recommend buying the stock and why/why not?
d. What is the dividend yield and capital gains yield today.

6. Financial Market is expecting a period of intense growth and has decided to retain more of its earnings to help finance that growth. As a result, it is going to reduce its annual dividend by thirty percent a year for the next seven years. After that, it will maintain a constant dividend. The pay out ratio is 32.5% and the company”s PE is 12. Last year, the company paid $3.60 as the annual dividend per share. You bought the stock at $34.

a. What is the market value of this stock if the required rate of return is 14.5 percent?
b. What are the dividends yields and capital gains yield today? Briefly discuss your findings.
7. A firm is considering Projects S and L, and X whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the NPV and/or IRR criterion, while the CFO favors the IRR method. You were hired to advise the firm on the best procedure. If the wrong decision criterion were used, how much potential value would the firm lose? Your required return is 6.00%
Year 0 1 2 3 4
CFS -$1,025 $380 $380 $380 $380
CFL -$2,150 $765 $765 $765 $765
CFx -3,670 $568 $675 $1630 $1850
a. Calculate Payback, discounted payback, NPV, IRR and Profitability Index for each and briefly discuss your findings.
b. Which project would you recommend is they are all mutually exclusive?
c. If you had enough funding for all three independent projects which would you recommend and why?
8. Top Motors has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the stock market during the past three years was 15.00%, but investors expect the annual future stock market return to be 13.00%.
a. What is the firm”s required return? Discuss your findings.
b. You have a portfolio of three securities with a beta of 1.05, what are the weights of the portfolio?
c. What is the beta of a three-asset portfolio with an expected return of 11?
9. Consider the following information on three stocks: A Portfolio is invested 35 percent in Stock A, B and 30 percent in stock C. What is the expected risk premium on the portfolio if the T-bill rate is 3.3 percent?