E6-1

5%+2.4%
7.4% The nominal rate of return on T-bills is 7.4%

E6-3

maturity yield real rate of interest inflation expectation

3m 1.41% 0.80% 0.61%
6m 1.71 0.80 0.91
2y 2.68 0.80 1.88
3y 3.01 0.80 2.21
5y 3.7 0.80 2.90
10y 4.51 0.80 3.71
30y 5.25 0.80 4.45

P6-9

security a security b
real rate of interest 2% 2%
inflation premium 9% 7%
11% 9%
the risk-free rate of security a is 11%
the risk-free rate of security b is 9%

b
security a security b
liquidity risk 1.0% 1.0%
deafult risk 1.0% 2.0%
maturity risk 0.5% 1.5%
other risk 0.5% 1.5%
3.0% 6.0%
total risk premium for security a is 3%
total risk premium for security b is 6%

c
security a security b
expected inflation premium 9% 7%
risk premium 3% 6%
real rate of interest 2% 2%
14% 15%
the nominal interest rate for security a is 14%
the nominal interest rate for security b is 15%

from the calculations, we can see that the nominal interest rate for security b is 1% higher than security a
This conclusion may appear surprising at first because the risk premium for security b is significantly larger than that for securi
However, because the inflation premium is larger for security a, this impact is neutralized, resulting in similar nominal interest

P6-10
A
no. of bonds issued 50,000,000/1,000
50,000
b
at maturity total expense would be (50m+3mx10yrs) 80,000,000
c
net after-tax total expense 50,000,000/(3,000,000 x 10 x (1-38%)
68,600,000
rger than that for security a.
similar nominal interest rates.
P6-13

PG-14

B
Based on these findings, we may conclude that the lowest
amount Laura must pay is when the assets are at danger.
(13,030.91)

So, if she wants to be sure that she will get a fair bargain,
the bare least she must spend is 13,030.91
(recall that the rate of return is biggest for the high-risk assets).
C

Based on the facts, we may deduce that the asset's value

decreases as the risk grows. The needed rate of return
rises as the risk rises, implying that the asset's value falls
as the risk rises. PILI KA
By raising the risk of obtaining cash flow from an asset,
the needed rate of return rises, lowering the asset's value. PILI KA

Based on the results, we may deduce that the asset's

value decreases as the risk grows. The needed rate of
return rises, lowering the asset's value

p6-17 sol'n nakabookmark h

a
required return of 11% 1,000,000
required return of 15% 783.18
required return of 8% 1,226.08

As can be observed, the bond value falls as the needed return rises.

When the needed return is less than the coupon rate, the
bond's market value exceeds the par value, and it sells for
a premium. When the needed return exceeds the coupon
rate, the market value is less than the par value, and the
bond is thus sold at a discount.

d
Because either the necessary return on the bond or the
coupon interest rate is likely to change,

Because of changes in economic circumstances, the cost

of funding has changed since the bond was issued.
The firm's risk has changed.

p6-21
a.
price 1045
period to maturity 10*2 20
face value 1000
annual coupon (1000*0.05/2) 25

SOLVING FOR YTM

0.02219 or 2.219% semi-anually. (4.438% per annum)

b.

Interest rates and bond prices are inversely related; as

one rises, the other falls down. What happens if interest
rates fall? If interest rates fell below your original 5%
coupon rate,

Your bond is more valuable than $1,000. It would be more

expensive since it would have a higher interest rate than
what was already available on the market. As a result, buy
bonds when interest rates are low.
P6-16 P6-8
A.
Nominal Rate
Inflation Premium
Real Return

b.
security a
security b
security c
security d
security e

c.
This exercise aims to explain why inflati

P6-22
NAKABOOKMARK
https://quizlet.com/explanations/questi
ST7-1
 4%
2%
2%

Real Rate Inflation Premium Risk Premium Nominal Rate

2% 6% 4% 12%
2% 5.5% 5% 12.5%
2% 5% 2% 9%
2% 4.8% 3% 9.8%
2% 6% 6% 14%

ise aims to explain why inflationary expectations differ among assets.

e2 link hehe
izlet.com/explanations/questions/yield-to-maturity-each-of-the-bonds-shown-in-the-following-table-pays-interest-annually-bond-par-val
ys-interest-annually-bond-par-value-coupon-interest-rate-years-to-maturit-28304d5d-e7bc3602-5ae6-4783-8a63-b21d1d62f809
-8a63-b21d1d62f809
P7-1 P7-2
A. A
authorized shares 2,000,000 par value 80
minus: shares outstanding 1,400,000 x: dividend 11%
no. of share to issue 600,000 annual dividend 8.8
the company can issue additional
600,000 shares the annual dividend will be 8.8
8.8
B quartely dividend 4
no. of issued shares 600,000 2.2
multiply: price per share 60 the dividend per quarter
money raised 36,000,000 qill be 2.2

The business will raise $36 million,

which will fall short of the $48
million required.
b
C

The dividend distributions are

The corporate charter must be
amended if the firm has to issue
extra shares.
referred to as the preferred stock's
cumulative feature. Before any
ordinary stockholder may get their
dividend, preferred equities with
the cumulative feature are
awarded the cumulative dividend
payment for all past periods. The
current dividend is paid if the
preferred stock lacks the
cumulative characteristic. Because
we're told in this section that the
dividend is noncumulative,
preferred owners will only get the
dividend for the current quarter,
which is $2.2 per share.
When a corporation issues new
stock, it increases the overall
number of stocks, reducing the
percentage of each given stock in
its overall equity. This results in a
dilution of ownership, which means
that current shareholders will end
up with a lesser percentage of total
stocks and, as a result, a smaller
share of the company's earnings
and dividends.
The current dividend is paid if the
preferred stock lacks the
cumulative characteristic. Because
we're told in this section that the
dividend is noncumulative,
preferred owners will only get the
dividend for the current quarter,
which is $2.2 per share.

To safeguard its current

stockholders, the firm offers them
a rights offering, which implies that
with each new issue of stocks,
existing stockholders will have the
right to purchase new stocks at a
lower price than the market price.
In order to keep that stake in the
future, each existing shareholder is
issued a number of new stocks
equivalent to its present part of the
overall equity.
c

As mentioned in the preceding

section, the cumulative
characteristic means that
preferred investors will get all
prior dividends before the
corporation may pay dividends to
common stockholders.

As a result, preferred investors

will receive dividends for the
previous three quarters and the
current quarter for a total yearly
payout of $8.8.
P7-3
case a case d
dividend per share 4 par value 60
add: dividend per share 4 multiply: dividend rate 1.5%
multiply: no. of periods passed 3 dividend in dollars 0.9

dividend payment 16 case e

par value 70
case b multiply: dividend rate 3%
par value 110 dividend in dollars 2.1
multiply: dividend rate 12%
dividend in dollars 109.9

2.2

case c

Because it is a non-accumulative
preferred stock, only the dividend
for the current period will be paid in
this situation. As a result, before any
dividends are paid to common
stockholders, the monetary amount
that stockholders must receive per
share is $3.
dividend per share
dividend per share 0.9
add: dividend per share 0.9
multiply: no. of periods passed 4
dividend payment 4.5
P7-7
A
5.30
Stock price 7%
75.71

Given an annual dividend of $5.30 and a

necessary rate of return of 7%, the market
value of the preferred shares is $75.71.

B
5.30
Stock price 8%
66.25

rate of return 5.30+66.25-75.71

75.71
round off mo -0.0549
-0.550

This indicates that the investor's rate of

return was -5.49% due to the acquisition and
subsequent selling of the preferred shares.

P7-8
Year Growth rate Dividend PV of dividends
2014 4% 2.08 1.96
2015 3 2.14 1.9
2016 2 2.18 1.83
value of stock

expected dividend (2017) 2.18 x (1+2%)

2.22

2.22
stock price (2016) 6%-2% 0.04
55.5

2016 stock price pv 55.5

)^3
(1+6%) 0.18 1.18
46.6
stock price (end of 2013) 1.96+1.90+1.83+46.60
52.29
the stock price at the end of 2013 should be $52.29.

P7-9
A
0.72
P 10%-7% 0.03
24

B
0.72
P 8%-7% 0.01
72

At this stage, we can show how much the

stock price changed when the rate of return
was reduced from 10% to 8%. This suggests
that it is a very sensitive model because
minor changes in some of the needed data
(such as the required rate of return) result in
substantial changes in the outcome.

When applied to ordinary life, this might

suggest that the information necessary to
apply the model must be exceedingly exact in
order for the output to be as accurate as
feasible. And depending on how reliable the
information to be utilized is, this might be a
negative.
P7-14
A

Dn+1 2.27x1.05
2.38

Pn 2.38
0.11-0.05 0.06
39.66666666667 39.72 dapatt

P0 39.72
)^3
(1+0.11)

29.05
P0 5.11+29.05
34.16

The curreny market value of the share is 34.16

b
Dn+1 2.27x1.00

2.27

Pn 2.27
0.11-0.00
20.63636363636 20.64

P0 20.64
)^3

(1+0.11)
15.09

P0 5.11+15.09
20.20
The curreny market value of the share is 20.20

c
Dn+1 2.27x1.10
2.50

Pn 2.50
0.11-0.10 0.01
250 249.7 dawwww
P0 249.7
)^3
(1+0.11)
182.58

P0 5.11+182.58
187.69
The curreny market value of the share is 187.69

P7-15
a zero-growth model b constant growth model
P0 42,500 42,500
0.18 P0 0.18-0.07 0.11
236,111 386,364
the current value of the firm is 236,111 the current value of the firm is 386,364

c free cash valuation model

P7-16
a
year free cash flow pv value factor pv of free cash flow
2015 400,000 0.93458 373,381.78
2016 300,000 0.87344 262,031.62
2017 550,000 0.81630 448,964.83
2018 450,000 0.76290 343,304.65
2019 400,000 0.71299 285,915.67
1,713,598.55 1713324.54

b
debt/equity 0.5

value to quity 1,713,330*2/3

1,142,220
1142220
stock price
P7-17
1,100,000 x (1+2%)
FCF from 2019 to infinity 8%-2%

1,122,000

6%
18,700,000

This indicates that the correct price for each share is $11.765.

We discovered that the

price per share should be
$11.765, but the
corporation is selling them
for $12.50, implying that
they are overvalued. We
would not acquire the stock
since the price given is
insufficient, and it will
ultimately reach its true
value, which is lower.
c
1,100,000 x (1+3%)
FCF from 2019 to infinity 8%-3%

1,133,000
5%
22,660,000

The anticipated value of the

FCF grew from $18 million
to $22 million by raising the
growth rate by 1%.

If the FCF grows at a 3%

annual rate beginning in
2019, the firm's total worth
would be $19,552,469.

In this case, the price per

share is now $14.41, and we
would buy the share since it
is originally being offered at
a lower price than it is truly
worth, making it an
attractive investment
opportunity.

P7-18 A
260,000 total assts 780,000
book value per share 10,000 common stock 260,000
26 preferred stoc 80,000
the book balue per share of the common stock is 26 440,000
4.4
B
cash 40,000
marketable securities 60,000
a/r & inventories (120,000+160,000)*90% 252,000
land and buildings (net) 150,000*130% 195,000
machinery & equip 250,000*70% 175,000
common stock 260,000
preferred stock 80,000
382,000

liquidated value per share 382,000

10,000
38.20
 P7-19
Firm expected EPS P/E multiple stock value
A 3.00 6.2 18.6
B 4.50 10.0 45
C 1.80 12.6 22.68

D 2.40 8.9 21.36

E 5.10 15.0 76.5

yung crop
18,700,000
22,660,000
P7-6 P7-7
D=LDX(1+g)
D= 5X[1+*-2%)]
5X98%
4.9
D
STOCK PRICE r-g

4.9
8%-(-2%)

4.9
10%
49

This indicates if we demand

an 8% rate of return, we are
prepared to spend $49 for
the stock.
P7-4
A
conversion ratio 5
common stock price 20
conv. Value pref. stock 100
the conversion value of a preferred stock is 100

Given that the conversion value of a preferred share

is $100 and the market value is $96.00, the investor
should convert preferred shares to common shares
to receive a better value.

When it comes to dividends (distribution of

earnings), preferred investors have priority over
common stockholders.

This implies that when the dividend is paid,

preferred investors will be among the first to
receive it.

Furthermore, in the event of the company's

bankruptcy, preferred investors will enjoy senior
rights to the company's assets over common
stockholders.

The proceeds from the sale of the company's assets

will be utilized first to repay preferred investors and
subsequently to repay common stockholders.

Aside from that, a dividend paid to preferred

shareholders is significantly more than one given to
regular shareholders.

P7-6