Calculations Shown

1) Company XYZ is currently trading at $97.00 a share. The expected growth rate is 4% and the Required Rate of Return is 7.8%. Calculate the next annual dividend amount using the Constant Dividend Growth Model.    

Note: D0 = current dividend; D1 = next annual dividend   

D1 = P0 (k – g)   

= ($97) (0.078 – 0.04)   

= $3.686/share   

Is this the correct answer? If not, please explain in detail.   

#2) Find the Yield to Call on a semiannual coupon bond with a price of $1,085, a    

Face Value of $1,000, a call price of $1,067, a coupon rate of 6.75%, 18 years remaining until maturity, 11 years remaining until the call date.    

Textbook Essentials of Investments, 9th edition, Bodie, 2013 Chapter 10 – Page 306   

Even with the textbook explanation, I could not understand how to solve this problem. Can you explain in detail?   

#3) An investor purchases 300 shares of ABC stock for a $15 a share and immediately sells 2 covered call contracts at a strike price of $20 a share. The premium is $2 a share. What is the maximum profit and loss?   

Maximum Profit:    

(Strike Price – Stock Purchase Price + Premium) (# shares purchased)   

($20 - $15 + $2)(300) = $2,100   

Maximum Loss: (Stock Purchase Price – Premium) (# shares purchased)   

($15 - $2) (300) = $3,900   

Is this the correct answer and method? If not, please explain in detail.   

#4) You are an analyst comparing the performance of 2 portfolio managers using the Sharpe Ratio measurement. Manager A shows a return of 16% with a standard deviation of 10% while manager B shows a return of 12% with a standard deviation of 6%. If the risk-free rate is 5%, which manager has the better risk adjusted return?    

Sharpe Ratio = S = (Ri – rf)/standard deviation   

Ri = Portfolio Return   

rf = Risk-Free Rate   

Sharpe Ratio (A) = (0.16 – 0.05)/0.10 = 1.1   

Sharpe Ratio (B) = (0.12 – 0.05)/0.06 = 1.167 (rounded)   

Manager (B) has the better adjusted return because the higher Sharpe ratio indicates that his portfolio has a lower yield but with a much lower risk than Manager (A).    

Is this the correct answer and is the analysis also correct? If not, please explain in detail.   

#5) Look at the following Balance Sheet and Income Statement and calculate the following ratios: Profit Margin, Return on Assets, Return on Equity.   

1998 (Millions $) Balance Sheet    

Assets    

Current Assets   

Cash $700   

Accounts Receivable $400   

Inventory $200   

Total Current Assets $1,300   

Fixed Assets   

Property, Plant, Equipment $2,000   

LESS: Accumulated Depreciation $500   

Total Fixed Assets $1,500   

Liabilities & Owners Equity (1998)   

Current   

Accounts Payable $700   

Notes Payable $300   

Total $1,000   

Long Term   

Long Term Debt $700   

Total $700   

Stockholders’ Equity (1998)    

Common Stock ($1 Par) $100   

Capital Surplus $100   

Retained Earnings $900   

Total Owners’ equity $1,100    

Total Liabilities & Stockholders’ Equity $2,800    

Income Statement (1998 Millions $)    

Sales $600   

Cost of Goods Sold $400   

Administrative Expenses $100   

Depreciation $510   

Earnings Before Interest & Taxes (EBIT) -$410   

Interest Expense $30   

Taxable Income -$440    

Taxes -$50   

Net Income -$390   

Dividends $0   

Addition to Retained Earnings -$390   

Other Information    

# Shares Outstanding (millions) 100   

Price per share $18.86   

Profit Margin = Net Income / Net Sales (revenue)    

-$390/$600 = -0.65   

ROA = Net Income / Total Assets   

-$390/$2,800 = -0.1392   

ROE = Net Income / Shareholders’ Equity   

-$390/$1,100 = -0.3545   

Are these answers correct and is the analysis correct? If not, please explain in detail.   

#6) Find the Intrinsic Value of the stock of Company ABC using the following data:    

Risk-Free Rate = 5%   

Market Risk Premium = 8%   

Expected Market Return = Risk-Free Rate + Market Risk Premium   

Beta = 0.9   

ROE = 12.5%   

Dividend Payout Ratio = 0.22   

Dividends for the next 4 years are expected to be: 0.59, 0.67, 0.76, 0.85   

Subsequent Growth will be at the computed growth rate (g)