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Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 20-year life when issued and the annual interest payment was then 13 percent. This return was in line with the required returns by bondholders at that point as described below: Real rate of return 3 % Inflation premium 5 Risk premium 5 Total return 13 % Assume that five years later the inflation premium is only 2 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 15 years remaining until maturity. Compute the new price of the bond. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) New price of the bond $
An inverted yield curve slopes
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.53 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?
An all-equity firm has a beta of .98. The firm is evaluating a project that will increase the output of the firm's existing product. The market risk premium is 7.3 percent and the risk-free rate is 3.4 percent. What discount rate should be assigned t..
What is the present value of an annuity of $6,500 per year, with the first cash flow received three years from today and the last one received 25 years from today? Use a discount rate of 7 percent.
What makes a good financial statement? What makes a poor financial statement? Why? Why is it important that companies have accurate financial statements?
Jasper Furnishings has $275 million in sales. The company expects that its sales will increase 10% this year. Jasper's CFO uses a simple linear regression to forecast the company's inventory level for a given level of projected sales. What are your f..
Which of the following actions are most likely to directly increase cash as shown on a firm’s balance sheet?
Howes Inc. purchases $4,562,500 in goods per year from its sole supplier on terms of 3/14, net 54. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit?
It is January 2015. You work as a financial analyst for Merck & Co. and are tasked with the due diligence on the proposed acquisition of a biotech startup. You estimated the following cash flows for the startup: What is the terminal value, i.e., the..
The D.J. Masson Corporation needs to raise $400,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 1/10, net 90, and it currently pays on the 10th day and takes discounts. However, it could forgo disco..
Two mortgage options are available: a 15-year fixed-rate loan at 6% with no discount points, and a 15-year fixed-rate loan at 5.75% with 1 discount point. Assuming you will not pay off the loan early, which alternative is best for you? Assume a $100,..
A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 7 percent annual dividend. The firm also has 15,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed t..
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