2. Suppose youre given with the following information for some assets; a 12-year 2%-coupon bond of semi-annual coupon payment with face value as $1,000, a common stock of $3.20 expected dividend with 2.5% growth rate currently. Both bond and common stock are issued by Company M&M. Answer the following questions.

Suppose the yield to maturity (that is, the discount rate) for the bond is 10%, what is the present value of this coupon bond? Is it a discount bond? Why? What if the discount rate is 4%?

Suppose the bond is in fact, callable. That is, the firm may repurchase it with the call price as $918 and the bond is callable at the end of year 4, what is the yield to call for this bond if the current bond price is $825? (That is, the discount rate for the bond if you choose to be called. Use IRR function in EXCEL for this question).

Suppose the stock price is $22.32 per share right now, and assuming the capital market is efficient, what is the required rate of return for the stock? What are the assumptions you have for this present value model?

Suppose the dividend growth rate for the g%. If the stock price right now is $20.85 per share, what is possible growth rate of dividends g if using the rate of return obtained from c)?

Suppose the bond is convertible. That is, at the end of the 3rd year after issuance, the holder of the bond has the right to convert the bond with 1 to 4 ratio toward company M&Ms common stock. Would you possibly convert the bond at the end of 4^th year if based on the above information in a) and c)?

Why the so-called fair value of financial asset is represented by the present value of future cash flows of financial asset?

3. Youre given with a mortgage from your credit union to buy a house that costs $620,000. Suppose you pay $124,000 for down payment and the current average market interest rate is 2.8% for the 15-year mortgage. Answer the following questions:

What is the monthly payment if there is no pre-payment penalty?

Suppose the credit union says that if youd like to retire the loan earlier, say at the end of the 7th year, you need to pay (say) $361,000 for the rest of the loan, would you take it given that you have no difficulty to generate the cash flow? Why or why not?

Suppose that the credit union also offers you another possible payment program that is they will give you a low 1.2% interest rate for the first 6 years and with a lump-sum payment at the end of the 6^th year as $532,000. (The lump-sum payment is a one-time payment that you must pay it off or, you need to re-finance by then.) What is your monthly payment for the first 5 years?

Suppose you follow the original mortgage in (a) without any refinancing or prepayment, and after 5 years of payments, you discover the current market interest rate for mortgage drops to 1.8% APR. Instead of paying off the mortgage, you are about to re-finance your mortgage for 15-year mortgage instead. What is your monthly payment for your mortgage now? Is re-financing good for you?

4. Answer True or False to the following questions and with Explanation. (No credits will be given if no explanation is shown)

a) The mutual funds are good for investments since they are all efficient portfolios.

b) The reason for time value of money is that money can earn interests.

c) The bonds yield to maturity is the required rate of return for creditors of the firm regardless of the investors holding horizons. Therefore, if Federal Reserve increases the money supply by reducing the required reserve in all banks, the bond yield will also increase.

d) The discount rate for future expected cash flows is defined as the cost of capital. Hence, it must cover all financing risk where the institution may arrange to finance the necessary capital for the investment projects.

5. You are given with the following information of two projects planned by your company. The initial costs are given as: $3 million for project A, and $2.5 million for project B, respectively.

Table 1: (in thousands)

Project	Year 1	Year 2	Year 3	Year 4	Year 5
A	-450	1250	-350	2200	2500
B	360	952	400	875	2250

Answer the following questions.

a) Suppose the actual cost of capital is 15%. What are the Net Present Values for these two projects?

b) Suppose the financial manager discovered that if we postponed the project B to two years later, the cost of capital could be 10% due to possible low future interest rates. However, the deferment may cost the firm additional $0.5 million to restart the facilities and the initial cost must be spent now, instead of two years later. Will you recommend waiting for additional 2 years to start?

c) Let the corporate income tax rate be 30%, the cost of debts be 6%, the cost of equity be 25% and there is no preferred stock issued by the firm. What is the debt-to-equity ratio for your company?