Question 1 (25 marks)

AMCOR Limited has a corporate bond outstanding with a 7% coupon, semi-annual interest, 15 years to maturity and a face value of $1,000. Similar bonds currently yield 13%. By prior agreement, the company will skip the coupon payments in years 6, 7 and 8 (6 payments in total; the payments at time 6 through to 8.5). These payments will be repaid, without interest, at maturity. What is the corporate bond's value (the price for AMCOR's bond)?

Question 2 (15 marks)

Storico Co. just paid a dividend of $3.85 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage per year until it reaches the industry average of 5 percent dividend growth, after which the company will keep a constant growth rate forever. If the required return on Storico stock is 13 percent per annum, what will a share of Storico's stock sell for today?

Question 3 (15 marks)

Your factory has been offered a contract to produce a part for a new printer. The contract would last for five years and your cash flows from the contract would be $3 million per year. Your upfront setup costs to be ready to produce the part would be $6.5 million. Your cost of capital for this contract is 10%.

a.What does the NPV rule say you should do?

b.If you take the contract, what will be the change in the value of your firm?

c.what is the payback period?

Question 4 (15 marks)

You have a portfolio with a standard deviation of 30% and an expected return of 18%. You are considering adding one of the two stocks in the following table. If after adding the stock you will have 20% of your money in the new stock and 80% of your money in your existing portfolio, which one should you add? Why? Explain.

Expected Return

Standard Deviation

Correlation with Your Portfolio's Returns

Stock A

15%

25%

0.2

Stock B

15%

20%

0.6

Question 5 (15 marks)

Suppose Intel stock has a beta of 1.8, whereas Boeing stock has a beta of 1.2. If the risk free interest rate is 5% and the expected return of the market portfolio is 15%, according to the CAPM,

a.What is the expected return of Intel stock?

b.What is the expected return of Boeing stock?

c.What is the beta of a portfolio that consists of 70% Intel stock and 30% Boeing stock?

d.What is the expected return of a portfolio that consists of 60% Intel stock and 40% Boeing stock?

Problem 6 (15 marks)

At the beginning of 2013, Apple's beta was 1.2 and the risk-free was about 3%. Apple's price was $75. Apple's price at the end of 2013 was $80. If you estimate the market risk premium to have been 6%, did Apple's managers exceed their investors' required return as given by the CAPM? Why? Explain.

Unit: FNCE5010 Corporate Financial Management Assessment: Assessment Task 1: Exercise - Part 2 Assessment Value: 15 percent of final grade Due Date: Workshop time in week 10 Please submit a hard typed copy of your exercise part 2 in class during the workshop time in week 10 or to your local instructor by the due date. The soft copy of your exercise must be submitted onto the Turnitin on your Blackboard. Note: Please attach the Turnitin report with the hard copy of your exercise part 2. Student ID:...................................... Family Name:................................... Given Name:..................................... Workshop Time:.................................. IMPORTANT INSTRUCTIONS: This assessment is due by above date and time. Show all working to demonstrate you have understood how to solve each problem. If you use a financial calculator, state the sequence of steps to solve the problem. Please present your answers in at least 4 decimal places. Students are to submit their assignments onto Blackboard. The assignment must be typed (Word or PDF). Answer must be legible. If the marker cannot follow or read your answers, marks cannot be rewarded. Answer all sections. Your assignment should meet the following requirements A copy of the assignment has been retained by me Declaration below is complete with signature Declaration Except where I have indicated, the work I am submitting in this assignment is my own work and has not been submitted for assessment in another unit or course. I am aware of Curtin University's guidelines for academic integrity and will abide by them (http://academicintegrity.curtin.edu.au/global/studentbook.cfm). Prior to submission of our assignment we will ensure that we meet together in order to go through the student checklist regarding prevention of plagiarism and ensure our assignment meets the guidelines. I warrant that any diskettes and/or computer files submitted as part of this assignment have been checked for viruses and reported clean. Page 1 of 3 _________________________________ (Signature of student) Topics covered: Lecture and Workshop 4 to 9 Question 1 (25 marks) AMCOR Limited has a corporate bond outstanding with a 7% coupon, semi-annual interest, 15 years to maturity and a face value of $1,000. Similar bonds currently yield 13%. By prior agreement, the company will skip the coupon payments in years 6, 7 and 8 (6 payments in total; the payments at time 6 through to 8.5). These payments will be repaid, without interest, at maturity. What is the corporate bond's value (the price for AMCOR's bond)? Question 2 (15 marks) Storico Co. just paid a dividend of $3.85 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage per year until it reaches the industry average of 5 percent dividend growth, after which the company will keep a constant growth rate forever. If the required return on Storico stock is 13 percent per annum, what will a share of Storico's stock sell for today? Question 3 (15 marks) Your factory has been offered a contract to produce a part for a new printer. The contract would last for five years and your cash flows from the contract would be $3 million per year. Your upfront setup costs to be ready to produce the part would be $6.5 million. Your cost of capital for this contract is 10%. a. What does the NPV rule say you should do? b. If you take the contract, what will be the change in the value of your firm? c. what is the payback period? Question 4 (15 marks) You have a portfolio with a standard deviation of 30% and an expected return of 18%. You are considering adding one of the two stocks in the following table. If after adding the stock you will have 20% of your money in the new stock and 80% of your money in your existing portfolio, which one should you add? Why? Explain. Stock A Stock B Expected Return Standard Deviation 15% 15% 25% 20% Page 2 of 3 Correlation with Your Portfolio's Returns 0.2 0.6 Question 5 (15 marks) Suppose Intel stock has a beta of 1.8, whereas Boeing stock has a beta of 1.2. If the risk free interest rate is 5% and the expected return of the market portfolio is 15%, according to the CAPM, a. What is the expected return of Intel stock? b. What is the expected return of Boeing stock? c. What is the beta of a portfolio that consists of 70% Intel stock and 30% Boeing stock? d. What is the expected return of a portfolio that consists of 60% Intel stock and 40% Boeing stock? Problem 6 (15 marks) At the beginning of 2013, Apple's beta was 1.2 and the risk-free was about 3%. Apple's price was $75. Apple's price at the end of 2013 was $80. If you estimate the market risk premium to have been 6%, did Apple's managers exceed their investors' required return as given by the CAPM? Why? Explain. Page 3 of 3