managerial finance

managerial finance

A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will
the price be 5 years from now? (2 points)

2. Kern Corporation’s 5-year bonds yield 7.30% and 5-year T-bonds yield 4.10%. The real risk-free rate is r* = 2.5%, the default risk premium for Kern’s bonds is DRP =
1.90% versus zero for T-bonds, the liquidity premium on Kern’s bonds is LP = 1.3%, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1)
× 0.1%, where t = number of years to maturity. What is the inflation premium (IP) on all 5-year bonds? (2 points)

3. Central Development Company just paid a dividend of $3.00 per share. The company just entered a very profitable growth mode and expects that its dividend will grow
15% annually over the next three years. In the spirit of under promising and over delivering, Central Development has told investors that after the third year it
expects the annual dividend to grow at a more reasonable rate of 2% per year. Currently, the risk free rate (RRF) is 2.5%, the market risk premium (RPM) is 6.5%, and
Central’s beta is 1.5.

If you want to buy Central’s stock today, how much are you willing to pay? (3 points)

4. Andrew has decided that given the current economic conditions he wants to have a portfolio with a beta of 0.9, and is considering Stock R with a beta of 1.3 and
Stock S with a beta of 0.7 as the only 2 candidates for inclusion. If the risk-free rate is 4% and the market risk premium is 7%, what will his portfolio’s expected
return be and how should he allocate his money among the two stocks? (3 points)

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