Price of Bonds, Stock and Computation of WACC
1. Which is the best approach to common stock valuation and why?
2. Which capital budgeting technique is consistent with maximizing shareholder wealth and why?
3. What role does depreciation play in break-even analysis based on accounting flows? Based on cash flows? Which perspective is longer term in nature?
4. Discuss the relationship between bond prices and interest rates. What impact do changing interest rates have on the price of long-term bonds versus short-term bonds?
5. Why is the cost of debt less than the cost of preferred stock if both securities are priced to yield 10 percent in the market?
Please show all of your computations. This part can be done in Excel.
1. Janice Smith wishes to accumulate $8,000 by the end of 5 years by making equal annual end-of-year deposits over the next five years. If Janice can earn 7 percent on her investments, how much must she deposit at the end of each year to meet this goal?
2. J& J just issued a bond with a $1,000 face value and a coupon rate of 7%. If the bond has a life of 30 years, pays annual coupons and the yield to maturity (YTM) is 6.8%, what will be the bond sell for?
3. Biogenetics, Inc plans to retain and reinvest all of their earnings for the next 30 years. Beginning in year 31, the firm will begin to pay a $12.00 per share dividend. The dividend will not subsequently change. Given a required return of 15%, what should the stock sell for today?
4. What is the NPV of a project that is expected to pay $10,000 a year for 7 years if the initial investment is $40,000 and the required return is 15%?
5. A firm has 2,000,000 shares of common stock outstanding with a market price of $2.00 per share. It has 2,000 bonds outstanding, each selling for $1,200. The bonds mature in 15 years, have a coupon rate of 10% and pay coupons annually. The firm`s beta is 1.2, the risk free rate is 5%, and the market risk premium is 7%. The tax rate is 34%. Calculate the WACC