financial management

FN 215 – Financial Management

Problem Set # 8

(Due: Monday, November 10, 2014)

Rules for all problem sets:

·         Do your own work.  Do not copy material from others.

·         Problem sets must be submitted in hard copy form.  Do not submit electronically.

Answer all 4 questions.

Question 1

Everything else being equal, what would happen to a bond’s price if Moody’s changes this bond rating from Baa to A?  Explain.

Question 2

Given the following bond’s characteristics.

Par value $1,500         Annual coupon 6.25%, interest payable semi-annually

Maturity 7 years          Bond price $1,406

A.    Using Excel ONLY, determine this bond’s annual “yield-to-maturity.” Round percentage answer to 2 decimal points (e.g.: 4.75%, 9.53%, etc.)  Attach Excel print-out with appropriate formula and answer.

B.     Is this bond priced at premium or discount?

Question 3

You expect interest rates to decrease.  From the corporate finance viewpoint, should you currently issue short term or long term bonds?  Explain.

Question 4

Given the following financial data for the U.S. economy and a specific company.

U.S. economy:

·         U.S. Treasuries annual yield: 2.3%

·         Prime rate: 3.5%

·         Expected rate of return on stock market: 7.0%

·         Inflation rate 2.5%

Company:

·         Beta value: 0.85

·         Stock price: $50/share

·         Earnings per share: $5.00

Based on the above information, calculate this company’s “rate of return stockholders require.”  Show all calculations.