Tutorial Practice Questions Bonds (YTM, Coupon and Price calculations) 1.

Tampa Corporation has a bond issue outstanding with a coupon rate of 7% per year and 10 years remaining to maturity. The maturity value is $1,000. Determine the current value of the bond if the prevailing market interest rate (K) is 8%. Assume that the coupon interest is paid semi-annually?

a. $1,000 b. $932 c. $938 d. $1,074 2. The current market price of Mattel Corporations bond is $891. The coupon rate is 8% (paid semi -annually), and par value is $1,000. If the bond matures 8 years from today, what is the bonds yield-to-maturity?

a. 4% annual b. 6% annual c. 8% annual d. 10% annual 3. A bond with a $1,000 face value and an 8 percent annual coupon pays interest semiannually. The bond will mature in 15 years. The nominal yield to maturity is 11 percent. What is the price of the bond today? a. $ 784.27 b. $ 781.99 c. $1,259.38 d. $1,000.00 e. $ 739.19 4. Palmer Products has outstanding bonds with an annual 8 percent coupon. The bonds have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is the yield to maturity on the bonds? a. 10.09% b. 11.13% c. 9.25% d. 8.00% e. 9.89% 5. In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today is as follows:

Long-term debt (bonds, at par) $10,000,000 Preferred stock 2,000,000 Common stock ($10 par) 10,000,000 Retained earnings 4,000,000 Total debt and equity $26,000,000 The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt? a. $5,276,731 b. $5,412,032 c. $5,547,332 d. $7,706,000 e. $7,898,650 NPV and IRR 6. You are evaluating the following mutually exclusive projects. The firms cost of capital is 9%.

Year 0 1 2 3 4 What is the NPV of X and Z? a. $4894, $3909 b. $4255, $3163 c. $4255, $2459 d. $3941, $2459

Project X (50000) 25000 20000 15000 5000

Project Z (50000) 5000 15000 20000 30000

7. At what discount rates do the NPV profiles of the above two projects cross? a. 8.5% b. 9.2% c. 6.1% d. 7.2% 8. Choi Computer Systems is considering a project that has the following cash flow data. What is the project's IRR? Year: 0 1 2 3 Cash flows: -$1,000 $450 $470 $490

a. b. c. d. e. 9.

13.89% 15.43% 17.15% 19.05% 20.96% Green Grocers is deciding among two mutually exclusive projects. The two projects have the following cash flows: Project B Cash Flow -$30,000 6,000 12,000 18,000 12,000

Project A Year Cash Flow 0 -$50,000 1 10,000 2 15,000 3 40,000 4 20,000

The companys cost of capital is 10 percent (WACC = 10%). What is the net present value (NPV) of the project with the highest internal rate of return (IRR)? a. $ 7,090 b. $ 8,360 c. $11,450 d. $12,510 e. $15,200 Beta, Corr and Cov 10. You are given the following returns on the Market and on Stock A. Calculate Stock A's beta coefficient. Year Market Stock A 2005 -5.00% -15.00% 2006 11.00% 12.00%

2007 a. b. c. d.

25.00% 1.74 1.83 1.92 2.02

40.00%

11. Historical rates of return for the market and for Stock A are given below: Year Market Stock A 1 6.0% 8.0% 2 -8.0 3.0 3 -8.0 -2.0 4 18.0 12.0 If the required return on the market is 11 percent and the risk-free rate is 6 percent, what is the required return on Stock A, according to CAPM/SML theory? a. 6.00% b. 6.57% c. 7.25% d. 7.79% e. 8.27% Excel Problems 1. Your firm is considering the two mutually exclusive projects with the following cash flows. Year Project A Project B 0 1 2 3 4 5 6 -22,500 8,000 8,000 8,000 8,000 8,000 8,000 -50,000 15,000 15,000 15,000 15,000 15,000 15,000

Required: (a) What is the NPV and IRR of each project? Assume WACC is 12%. (b) Use Data Table function in Excel to compute NPV of each project by changing WACC from 0% to 30% (increments of 2%) and graph the NPV profiles. Indicate the rate which the two projects have the same NPV. (c) Now, use the delta project approach to find the cross-over rate.

2.

You are considering the following project with multiple change in signs.

Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Cash flow -350,000 2,500,000 -3,000,000 500,000 500,000 500,000 500,000 -14,000,000 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000 -11,000,000

Required: (a) Use Data Table to determine the NPV of the cash flows between 0 and 100% (at increments of 5%) and beyond 100% discount rate use increments of 50% to determine the third IRR! (b) Use Excels IRR function with its Guess option to identify the three IRRs exactly. 3. You are given the following unevenly spaced cash flows of a project which has a WACC of 15%. What is the NPV and IRR of the project? (Hint: You will need to use XIRR and XNPV functions in Excel).

Date 16-Feb-01 5-Apr-01 15-Jul-01 22-Sep-01

Payment -600 100 100 100

22-Sep-02 22-Sep-03 22-Sep-04 22-Sep-05 22-Sep-06 22-Sep-07 22-Sep-08 22-Sep-09

100 100 100 100 100 100 100 100

4. Year 0 1 2 3 4 5 6

You are given the following data. Truck A Truck B -100 -250 150 300 150 300 150 300 150 150 150

If the discount rate is 12%, which truck would you choose.