Question
2) A stock has an expected return of 10.2 percent, the risk-free rate is 3.9 percent, and the expected return on the market is 11.10
2) A stock has an expected return of 10.2 percent, the risk-free rate is 3.9 percent, and the expected return on the market is 11.10 percent.
- What must the beta of this stock be? (5 points)
- Is it more or less risky than average? (5 points)
- Explain what is that the beta coefficient measures. (5 points)
3) A company currently has a cost of equity of 17.8 percent. The market risk premium is 10.2 percent and the risk-free rate is 4.4 percent. The company is acquiring a competitor, which will increase the company's beta to 1.6. What effect, if any, will the acquisition have on the firm's cost of equity? (10 points)
4) A corporate bond matures in 17 years, pays an annual coupon rate of 5%, has a par value of $1,000 and a required rate of return of 5.90%.
- What is the current market value of this bond? (10 points)
- In one year, would you expect the bond price to increase or decrease from its current market value? Explain why. (5 points)
5) Master Inc. has bonds that mature in 6 1/2 years with a par value of $1,000. They pay a coupon rate of 9%. If the required rate of return on these bonds is 11%, what is the bond's value? Assume semiannual coupon payments. (15 points)
6) What is the yield to maturity of a corporate bond with 13 years to maturity, a coupon rate of 8% per year, a $1,000 par value, and a current market price of $1,250? Assume semiannual coupon payments. (15 points)
7) Define interest rate risk. How does a bond's level of interest rate risk depend on its maturity? (10 points)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started