1. Answer the following questions:

a. What are the three primary bond rating agencies? What do bond ratings measure?

b. Why do US corporations build manufacturing plants abroad when they could build them at home?

2. Tidewater Home Health Care, Inc. has a bond with eight years maturity, a coupon rate of 10% with interest paid annually, and a par value of $1000. The current market price of bond is $1251.22. What is the bond’s yield to maturity? What is its current yield? Show your work.

3. Stocks M and W have the following historical returns:

Year Stock M Stock W

2007 -19% -12.50%

2008 35% 22.75%

2009 15% 34.50%

2010 -1.70% -7.15%

2011 27% 23.30%

a. Calculate the average rate of return for each stock during the 5-year period.

b. Assume that you are planning to hold a portfolio consisting of 45% of Stock M and 55% of Stock W. What is the realized rate of return on the portfolio in each year?

c. What is the average return on the portfolio for the 5 year period?

d. What is the standard deviation of returns for each stock and for the portfolio?

e. Calculate the coefficient of variation for each stock and for the portfolio?

4. Alcoa’s Inc.’s Pension Fund holds 4 stocks. The market’s required rate of return is 5% and the risk free rate is 3%.

Stock Investment Beta

A $250,000 1.65

B $350,000 -0.75

C $750,000 1.05

D $450,000 0.75

a. What is this fund’s beta?

b. Calculate the required rate of return.

5. Rocking technologies (RT) have just developed a solar panel capable of generating 200% more electricity than any solar panel currently on the market. As a result, RT is expected to experience a 15% annual growth rate for the next 5 years. By the end of 5 years, other firms will have developed comparable technology and RT’s growth rate will slow to 5% per year indefinitely. Stockholders require a return of 6% on RT’s stock. The most recent annual dividend (D0) which was paid yesterday was $2.55 per share.

a. What are the expected dividends for years 1 to 5?

b. What is the intrinsic value of the stock (P0)?

c. What are the dividend yield, capital gains yield and the expected total return for year 1?

6. You are considering an investment in Crisp Cookware’s common stock. The stock is expected to pay a dividend of $2 a share at the end of this year (D1 = $2.00); its beta is 0.9; the risk-free rate is 5.6%; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g; and the stock currently sells for $25 a share. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years (i.e., what is P3)?

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