Homework 4 1. If a firm has a payout ratio of 65% and a ROE on projects of 11%, what is the growth rate for the firm? 2. Assume a firm has a cost of capital of 13%, and their future projects have an ROE of 10%. As their plowback ratio increases, how will their P/E ratio change. Why? 3. If Apple is expected to pay a dividend of $3 next year, and it is expected to grow at a rate of 2%. If Apple's cost of capital is 15%, what is a fair price for Apple? 4. If instead, we assume that Apple will grow at 15% in the next 2 years, then drop down to 10% in the 3rd year, and finally reach a steady growth rate of 3%. If the cost of capital is 15% and this years dividend is $4, what is a fair price of Apple? 5. Using the following information, find the price of the bond with semi-annual coupon payments and $1,000 par value. Round to two digits. a. What is the duration of this bond? Settlement Date 2/15/2015 Maturity Date 2/15/2035 Coupon Rate 12.00% Required Return 8.00% 6. If the US treasury issued a 5-year zero coupon bond, what is its modified duration? a. If interest rates increased by 2%, what would be the estimate of how much the price would change? 7. Assume a hedge fund manager owns 50,000 shares of AMZN and they bought the stock when it was trading at $85/share. If the manager has a short-term price target of $115, at which point they will sell the stock, what would be the optimal strategy for the manager to use options and gain additional portfolio income. 8. All else equal, American put options are worth more than European put options. Why? How can Black-Scholes help us understand this? 9. If you are examining a firm and see that their ROE as been constant over the past few about years, but their leverage has been dramatically increasing, what does that tell you profit margin if asset turnover has also been relatively steady.