INSTRUCTIONS
I. SHOW YOUR WORK
II. YOUR GRADE IS BASED ON THE ELABORATION, ELUCIDATIO, CONVICTION AND CORRECNESS OF YOUR ANSWERS.
III. YOU HAVE TO DO SEVEN QUESTIONS. YOU OUGHT TO ANSWER 5 PROBLEMS AND TWO MORE QUESTIONS OF YOUR CHOICE. A QUESTION IS EITHER A PROBLEM, OR AN ESSAY OR A SET OF DEFINITIONS. EACH QUESTION IS WORTH THE SAME POINTS.
A.PROBLEMS.
1. There is a preferred stock, which pays $8, has market rates of 8% and is callable at year 3 at 109 of its value. If it is not called, then it keeps paying $8 to an investor.
a) Derive the value at year zero assuming it will be called.
b) Derive its value, after it is not called.
2. a)There is a municipal bond in which we are interested in investing. How much should it pay to be competitive with a corporate bond paying 5%? The tax rate is 40%.
b) If a corporation invests in preferred stock paying .10 and it has a tax rate of .4, what is the effective rate of return it makes?
3. The price of a 23 year, 5% callable bond at call date is 1090 and its required rate is 4%. If the bond is callable at 3 years, what is the price of the bond now assuming it is called? If the firm does not redeem the bond, at the point that it may do so, what is the price of it, if market rates are 11%?
4. The Z score is 2.5. The values of X1, X2, X3, X4 and X5 are respectively .1, .3,.4 , .2 and you have to compute the last one. Explicate the meaning of the different determinants of the Z score. Will this company default?
5. The price of a 20 year, 12% bond is $875. There is an option, and the firm may purchase the bond back in 4 years. Derive the yield to maturity and the yield to call.
6. A firm has net profit margin, average collection period, ITO, TIE and Debt to Equity of 7%, 20 days, 3 times, 2 times and 1.5, respectively. The industry has 4%, 30 days, 6 times, 4 times and 1 respectively. Discuss the performance of the firm versus the industry.
B. ESSAYS
1. Expound on the determinants of high yield bonds according to Jane Tripp Howe.
2. Analyze the limitations of financial ratios. That is the correct use of ratios? Which disadvantage do market ratios address?
3.There are a few determinants of bond prices. Discuss how inflation, options, monetary policy and liquidity affect bond prices.
4. Compare and contrast preferred stocks to bonds in terms of fixity of payment, onerousness of the fixed payment taxability. Explicate the reason that yields relate inversely with the prices of those two types of Investments.
5. Elucidate the metrics professor Beaver used to predict firm failure.
C.DEFINITIONS
1. Asset Turnover
2. Return on Assets
3. Average payment period
4.Quick ratio
5. ROE