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You just purchased a coupon bond with face value $1000, 6% coupons, and three years remaining to maturity. Assume that all market interest rates are 7 %. (a) What is the duration of this bond? (b) Compute the exact price change (using the present value formula) if interest rates drop to 6.75%. (c) Use the duration to compute the approximate price change due to a drop in interest rates to 6.75%. How large is the approximation error (in dollars)?
Rally Inc. is an all-equity firm with assets worth $25 billion and billion shares outstanding. Rally plans to borrow $10 billion and use these funds to repurchase shares. The firm’s corporate tax rate is 35%, and Rally plans to keep its outstanding d..
Free Cash Flow Tater and Pepper Corp. reported free cash flows for 2015 of $39.1 million and investment in operating capital of $22.1 million. Tater and Pepper incurred $13.6 million in depreciation expense and paid $28.9 million in taxes on EBIT in ..
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straightline over 6 years to a value of zero, but in fact it can be sold after 6 years for $..
That Wich Corp. had additions to retained earnings for the year just ended of $192,000. The firm paid out $182,000 in cash dividends, and it has ending total equity of $4.87 million. The company currently has 100,000 shares of common stock outstandin..
Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $11.65, but management expects to reduce the payout by 4 percent per year indefinitely. If you require a return of 12 percent on this stock, what will you pay for a sha..
Doisneau 22 year bonds have an annual coupon interest of 8%, make interest payments on a semiannual basis, and have a $1,000 par value. If the bonds are trading with a market’s required yield to maturity of 14%, are these premiums or discount bonds? ..
Multiple IRRs for a particular project can occur when there is (are):
Assume Colgate-Palmolive Company has just paid an annual dividend of $0.95. Analysts are predicting an 11.4% per year growth rate in earnings over the next five years. After that, Colgate's earnings are expected to grow at the current industry averag..
A commercial customer is not able to pay for delivery of some construction materials.. The supplier is local, and also a customer of the bank. Suggest which products might be useful to them, and how they are consistent with the aims of Islamic bankin..
You purchase a stock today for $32.38. You think a similar risk investment should earn 11.6%. You plan to hold the stock for 3 years. If you sell the stock for $40.00, would you reach your required investment goal?
A portfolio contains equal investments in 6 different loans with durations of 1, 2, 2, 2, 4, and 5 years. You have estimated that it is 95% certain that interest rates won't change by more than 2% over the next year. Compute the maximum possible loss..
Under what circumstances are stocks less risky than bonds?
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