Question #1:

Determine the following based on the data provided for this debt issue:

Issued October 1, 2008, $500,000 face value, 5.5% annual coupon payable semiannual.

Bond term: 15 years

Current market bond yield January 31, 2013: 4.5%

What is the bond’s market value on January 31, 2013?

What is the return on the investment for the seller of the bond on January 31, 2013?

What is the yield to maturity for the buyer of the bond on January 31, 2013?

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Question #2:

Part I: Maxwell Inc.’s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a ‐28% return. What is the firm’s expected rate of return?

Part II: Data for Dana Industries is shown below. Now Dana acquires some risky assets that cause its beta to increase by 30%. In addition, expected inflation increases by 2.00%. What is the stock’s new required rate of return?

Initial beta 1.00

Initial required return (rs) 10.20%

Market risk premium, RPM 6.00%

Percentage increase in beta 30.00%

Increase in inflation premium, IP 2.00%

Question #3:

Part I: A stock is expected to pay a dividend of $0.75 at the end of the year.

The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%.

What is the stock’s current price?

Part II: If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock’s expected total return for the coming year?

Part III: Expected rate of return for your firm’s stock.

As of today:

Risk Free Rate (rf) = 3.0%

Market return (rm) = 11.0%

Find the current beta for the company you selected in our course and determine the Expected Rate of Return for this company.

Question #4:

Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The before‐tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company’s WACC?