Finance Question - Corporate Finance

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Goldey-Beacom College Corporate Finance (FIN623) I. Elsaify Final Exam Spring II, 2013 Warning You have promised, and are expected to, complete this Exam alone. You are not to discuss the Exam, or any part of it, in any way with anybody under any circumstances. Any evidence to the contrary will result in a failing grade in the course and a violation of the Academic Honor Code. Instructions: 1. Your Answer must be submitted by hand by 1:00pm Saturday, 4/27/2013 2. Your name must be written on every page. 3. Your Answer cannot exceed the Exam 4 pages.

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1. (15 Points) Mr. Alert Tucker of Pleasant Valley, Ohio is an investor who is interested in allocating part

of his portfolio to investment-grade corporate bonds with 15-year maturity. He recently received two proposals to choose from.

Prudential: A 7% coupon bond that sells for $1,100. Coupon payments are made semiannually. Morgan Stanley: A 6% coupon bond that sells for $980. Coupon payments are made annually.

a. Calculate each option YTM and CY. b. If Prudential bond can be called at the end of five years at a call value of 950, calculate YTC. c. If Morgan Stanley bond can be called at the end of seven years at a call value of 985, calculate

YTC. Answer a.

Bond N PMT FV PV I=YTM CY Prudential Morgan Stanley

b. Bond N PMT CV PV YTC

Prudential c.

Bond N PMT CV PV YTC Morgan Stanley

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2. (15 Points) DesinceLogic is a fast growing company that distributes 20% of its earnings as dividends. An institutional investor plans to hold the company stock for 10 years. The investor seeks 15% rate of return, and expects the stock to be traded at 30 times earnings at the end of 10 years. Current earning is $4/share (E0=4). Earning with grow at a rate of 21% during the first year, and decline by 3% every year during the following 4 years reaching 9% in year 5. The growth rate will continue to be 9% for the remaining 5 years. a. Use the combined earnings and dividend model to determine the current value of the stock. b. How much is the growth rate after year 10?

Answer

Time G Earnings Dividend Future Price

D+FP PV

0 $ 4.00 1 0.21 2 3 4 5 0.09 6 0.09 7 8 9 10

Stock Value

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3. (20 Points) The following table gives hypothetical data on 2 stocks in a hypothetical portfolio, in addition to the risk free rate of return, along with market portfolio return. a. Track the portfolio expected return, standard deviation, and Beta for a mix of the 2 stocks that

changes in 10% increments starting with the portfolio fully invested in Y ( 100%, 0%)y xW W  and

ending up with the portfolio fully invested in X ( 100%, 0%)x yW W  as shown on the attached table.

b. Is the expected return given consistent or inconsistent with CAPM? Explain your answer.

Answer

Inputs S.D. E(R) Beta

Ri s ky As s et X 20.0% 16.0% 2.5 Ri s ky As s et Y 15.0% 12.0% 1.5 Correl ati on (r) 0.0% Ri s k Free Rate (Rf) 0.0% 6.0% 0 Market Portfol i o 10.0% 1 Outputs

Wx E(Rp) SDp Bp EPF 0.0%

10.0% 20.0%

100.0%