1.)Calculating EAR: First National Bank chargers 13.8% compounded monthly on its
1.)Calculating EAR: First National Bank chargers 13.8% compounded monthly on its business loans. First United Bank charges 14.1% compounded semi-annually. As a potential borrower which bank would you go to for a new loan? Why?
2.)Calculating APR: Evergreen credit corp. wants to earn an Effective Annual Return on its consumer loans of 18.2% per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers? Explain why this rate is misleading to an uninformed borrower.
3.)Valuing Bonds: Yan Yan Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.7% paid semiannually and 13 years to maturity. The yield to maturity of the bond is 5.05%. What is the dollar price of the bond?
4.)Zero Coupon Bonds: You find a zero coupon bond with a par value of $10,000 and 24 years to maturity. If the yield to maturity on this bond is 4.2%, what is the price of the bond? Assume semi-annual compounding periods.
5.)Interpreting bond yields: Suppose you buy a 7% coupon, 20-year bond today when its first issued. If interest rates suddenly rise to 15%, what happens to the value of your bond? Why?
6.)Stock Values: The RLX Co. just paid a dividend of $3.20 per share on its stock. The dividends are expected to grow at a constant rate of 4% per year, indefinitely. If investors require a return of 10.5% on this stock, what is the current price? What will the price be in 3 years? What will the price be in 15 years?
7.)Nonconstant Growth: Metallica Bearings, Inc. is a young startup company. No dividends will be paid on the stock over the next 9 years because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $14 per share 10 years from today and will increase the dividend by 3.9% per year, thereafter. If the required return on this stock is 11.5%, what is the current share price?
8.)Calculating portfolio betas: You own a stock portfolio invested 15% in Stock Q, 20% in Stock R, 30% in Stock S, and 35% in Stock T. The betas for these four stocks are .79, 1.23, 1.13, and 1.36 respectively. What is the portfolio beta?
9.)Using CAPM: A stock has a Beta of 1.15, the expected return on the market is 11.3%and the risk-free rate is 3.6%. What must the expected return on this stock be?
10.)WACC: On the most basic level, if a firm’s WACC is 12%, what does this mean?