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Assignment 4

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Maryam Alaleeli
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24 views3 pages

Assignment 4

Uploaded by

Maryam Alaleeli
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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FINANCIAL MANAGEMENT

Answer the following 10 questions, and explain your answer; each correct answer is 10
points.

RULES:

i) In your TYPED Answer Sheet, do not include the questions. Include your
answers only.
ii) If you get a high match (more than 70%) you automatically will get ZERO. No
exceptions!
iii) You will see your match when you upload your assignment. If you get a high
match from Safe-Assign, simply rewrite your answers and reupload. You
have 3 attempts.
iv) No handwritten answers as I cannot check Safe-assign for plagiarism.
v) Do honest work and you will get good marks. If not I will not reward
dishonest behavior!

1) Hiba Inc. just issued zero-coupon bonds with a par value of $1,000. If the bond has a
maturity of 15 years and a yield to maturity of 10%, what is the current price of the
bond if it is priced conventionally with semi-annual discounting?
2) a) Petty Productions Inc. recently issued 30-year $1,000 face value, 12% annual
coupon bonds. The market discount rate for this bond is only 7%. What is the current
price of this bond? B) If this a callable bond do you expect investors to pay more or less
for the bond? Explain your logic.
3) Five years ago, Tayr Inc. issued twenty-five-year 10% annual coupon bonds with a
$1,000 face value each. Since then, interest rates in general have risen and the yield to
maturity on the Thompson bonds is now 12%. Given this information, what is the fair
market price today for a Tayr’s bond? Do investors take into account credit rating of
Tayr when they purchase their bonds?
3) Tayr Airways Inc. has a 12% required rate of return. It does not expect to initiate
dividends for 15 years, at which time it will pay $2.00 per share in dividends forever. At
that time, Tayr Airways expects its dividends to grow at 7% forever. What is an
estimate of Tayr Airways' price in 15 years (P15) if its dividend at the end of year 15 is
$2.00?
4) When you price a bond what discount rate do you use to find the fair market value of
a bond?
5) Carta Industries Inc. issued a zero-coupon bond 5 years ago that had a maturity of 55
years. The bond's par value is $1,000, and the current yield on similar bonds is 7.5%.
What is the expected price of this bond, using the semiannual convention if it is traded
in the secondary market?

6) Discuss (=in one sentence) whether the following statements are true or false.
A) The payment of cash dividends to shareholders is a deductible expense for the
company.
B) Unlike coupon payments on bonds, which are treated as an interest expense of the
firm, common stock dividends are considered a return of capital to shareholders and
not an expense of the firm.
C) For the shareholder, receipt of dividends is a taxable event.
D) A typical practice of many companies is to distribute part of the earnings to
shareholders through cash dividends.
E) If an investor purchases 20% of the initial issue of the company, the investor then
owns 20% of the company, given the one vote-one share norm.
F) After an initial offering, the company can sell more shares to the public at a later date.
If the investor who originally purchased 20% does not purchase 20% of the subsequent
issue, his or her ownership is diluted below 20%.
G) A preemptive right enables one to maintain one's proportional level of ownership.
H) A preemptive right is never particularly valuable to shareholders with large
ownership percentages.

7) Taftuf Airlines paid the following dividends from 2014 to 2018:

2014 2015 2016 2017 2018


$2.05 $2.01 $2.15 $2.10 $2.20
The airline is expected to pay the average dividend growth expressed above forever. If
investor require 12 percent rate of return on the airline, what is the fair market value of
its stock in 2019?

8) Denver Inc. has an 11.5% required rate of return. It does not expect to initiate
dividends for 20 years, at which time it will pay $3.75 per share in dividends. At that
time, Denver expects its dividends to grow at 6% forever. What is an estimate of
Denver's price in 20 years (P20) if its dividend at the end of year 20 is $3.75? What is its
price in today's dollars if you desire a rate of return of 12%?

9)) The Nimnim Company just paid an annual dividend of $1.12. If you expect a
constant growth rate of 4% and have a required rate of return of 13%, what is the
current stock price according to the constant growth dividend model?
10) a) In 2012 Kabir Inc paid $1.25 as dividend. In the most recent dividend in 2019 the
dividend was $1.80. The number of years between these two dividends (n) is 7 years. If
the required return of 12.21%. What is the current stock price if we anticipate dividends
stopping in 10 years (because the company will go bankrupt)? B) if the company pays
the dividends forever (does not go bankrupt) what is the current stock price?

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