Instructions
Please complete the following:
Â· Problem P6-9
Â· Problem P6-17
Â· Problem P6-31
Â· Problem P7-20
Â· Problem P7-23
Ca
y all calculations to TWO decimal places to reduce rounding e
or, especially in multi-step problems.
Remember to show all calculations. You must show your calculation and solution please see the example below. If you do not show how you a
ived at your answers, you will not receive credit. Merely showing the formula without the calculations is not sufficient. The problems should be set up in columns or using other appropriate formatsâ€”do not hide all steps in formulas behind one answer. I must still be able to see how you a
ived at the answer. EXAMPLE OF HOW WORK SHOULD LOOK
General Instructions for Written Assignments
Please only submit one Excel file with all problems included. Submit an Excel file, please put one problem on a separate worksheet within one file
Â· Problem P6-9
Term structure: A one-year Treasury bill cu
ently offers a 5% rate of return. A two-year Treasury note offers a 5.5% rate of return. Under the expectations theory, what rate of return do investors expect a one-year Treasury bill to pay next year?
Â· Problem P6-17
Asset valuation and risk: Laura and Drake wishes to estimate the value of an asset expected to provide cash inflows of $3,000 per year for each of the next four years and $15,000 in five years. Her research indicates that she must earn 4% on low-risk assets, 7% on average-risk assets, and 14% on high-risk assets.
a. Determine what is most Laura should pay for the asset if it is classified as (1) low risk, (2) average risk, and (3) high risk.
. Suppose that Laura is unable to assess the risk of the asset and wants to be certain sheâ€™s making a good deal. On the basis of your findings in part (a), what is the most she should pay? Why?
c. All else being the same, what effect does increasing risk have on the value of an asset? Explain your answer in light of your findings in part (a)
Â· Problem P6-31
Bond valuation and yield to maturity: Mark Goldsmithâ€™s
oker has shown him two bonds issued by different companies. Each has a maturity of five years, a par value of $1,000, and a yield to maturity of 7.5%. The first bond is issued by Cra
le Waste Disposal Corporation and has a coupon rate of 6.324% paid annually. The second bond, issued by Malfoy Enterprise, has a coupon rate of 8.8% paid annually.
a. Calculate the selling price for each bond
. Mark has $20,000 to invest. If he wants to invest only in bonds issued by Cra
le Waste Disposal, how much of those bonds could he buy? What if he wants to invest only in bonds issued by Malfoy Enterprise? Round your answers to the nearest integer.
c. What is the total interest income that Mark could earn each year if he invested only in Cra
le bonds? How much interest would he earn each year if he invested only in Malfoy bonds?
d. Assume that Mark will reinvest all the interest he receives as it is paid, and his rate return reinvested interest will be 10%. Calculate the total dollars that Mark will accumulate over five years if he invests in Cra
e bonds or Malfoy bonds. Your total dollar calculation will include the interest Mark gets, the principal he receives when the bonds mature, and all the additional interest he earns from reinvesting the coupon payments that he receives.
e. The bonds issued by Cra
le and Malfoy might appear to be equally good investments because they offer the same yield to maturity of 7.5%. Notice, however, that your answers to part (d) are not the same for each bond, suggesting that one bond is a better investment than the other. Why is that the case?
Â· Problem P7-20
Book and liquidation value: The balance sheet for Gallinas Industries is as follows
Additional information with respect to the firm is available:
(1) Prefe
ed stock can be liquidated at book value.
(2) Accounts receivable and inventories can be liquidated at 90% of book value.
(3) The firm has 10,000 shares of common stock outstanding.
(4) All interest and dividends are cu
ently paid up.
(5) Land and buildings can be liquidated at 130% of book value.
(6) Machinery and equipment can be liquidated at 70% of value.
(7) Cash and marketable securities can be liquidated at book value.
Given this information, answer the following:
a. What is Gallinas Industries' book value per share?
. What is its liquidator's value per share?
c. Compare, contrast, and discuss the value found in parts (a) and (b)
Â· Problem P7-23
Integrative Risk and Valuation: Given the following information for the stock of Foster Company, calculate the risk premium on its common stock