Homework 2 Part 2 Welch
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Subject
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Date
Apr 3, 2024
Type
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Uploaded by danielw3lch
FI 389 Homework 2 Part 2: Instructions
This workbook contains the questions pertaining to Bond Valuation and Cost of Capital. Thes
will be covered on Exam 2.
Put the your name and Crimson email address into the sheet titled "Your Info". Remember t
can work in groups but each student must submit their own file with their own work (you m
download and complete this workbook on your own).
The remaining sheets each contain 1 question, although they have multiple parts. Cells shad
orange will be graded and hence should be filled in.
Each question is equally weighted and you can receive partial credit. Make sure that you do
your calculations in Excel. If you do the calculation by hand or on a calculator and then type
answer you will receive 0 points, even if the answer is correct.
Ifyou run into diffuculty with the file upload, you can email it to me (cawhaley1@cba.ua.edu
Remember that I will NOT accept late homework under ANY circumstance, so get the home
turned in early.
If you have any questions, please ask, and good luck!
se topics that you must ded in o all of e in the u). ework
98586
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Your Info
Last Name
First Name
Email
Student
Welch
Daniel
dbwelch@crimson.ua.edu
98586
Question 1
Wayne Enterprices Bonds
Price
$ 823.00 2/15/2010
Par Value
$ 1,000.00 2/15/2019
Coupon Rate
7%
Payment Frequency
2
Maturity
9 years
Required Return
12%
Valuation
$729.31 9.60%
Yield to Maturity
12.00%
Macauley Duaration
6.391
Modified Duration
6.030
As an investor, you are considering an investment in the bonds of Wayne Enterprises. The bonds pay inter
semiannually, will mature in nine years, and have a coupon rate of 7% with a par value of $1,000. Current
are selling for $823.
A - If the required return for bonds this risky is 12%, what is the highest price you would be willing to pay?
B - What is the yield to maturity for these bonds?
C - What is the Macauley Duration for this Bond? What is the Modified Duration?
D - Construct a line chart showing the relationship between yield an price for this bond. Use the table to d
price at specfic yields. $120.00 $140.00 $160.00 $180.00 Price
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Place Chart Here!
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10
%
11
%
12
%
13
%
14
%
15
%
16
%
17
%
18
%
19
%
20
%
$- $20.00 $40.00 $60.00 $80.00 $100.00 $120.00
Yield
Price
0%
$ 163.00 1%
$ 151.52 2%
$ 141.00 3%
$ 131.35 4%
$ 122.49 rest tly the bonds ?
determin the
5%
$ 114.35 6%
$ 106.88 7%
$ 100.00 8%
$ 93.67 9%
$ 87.84 10%
$ 82.47 11%
$ 77.51 12%
$ 72.93 13%
$ 68.70 14%
$ 64.79 15%
$ 61.18 16%
$ 57.83 17%
$ 54.72 18%
$ 51.84 19%
$ 49.17 20%
$ 46.69
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Question 2
Source
Book Value
Quantity
weight
Common Stock
$ 700,000.00 4,000 10.37%
Preferred Stock
$ 1,050,000.00 15,000 15.56%
Debt
$ 5,000,000.00 5,000 74.07%
Bonds
Preferred Stoc
Current Maturity
7
Dividend
Coupon Rate
6%
Price
Frequency
2
Cost of Preferred Equity
Par Value
$ 1,000.00 Price
$ 750.00 Yield to Maturity
11.26%
After-Tax Cost of Debt
7.32%
Source
Weight
Common Stock
10.37%
0.85%
Preferred Stock
15.56%
1.11%
Debt
74.07%
5.42%
Source
Weight
Common Stock
2.44%
0.20%
Preferred Stock
21.34%
1.52%
Debt
76.22%
5.58%
Debt is represented by bonds issued 5 years ago with an original maturity of 12 years, a coupon
interest semiannually. The preferred stock pays a $5 dividend annually and is currently priced a
$30 and is expected to pay a dividend of $1.25 next year. It is also expected to increase the divid
pays a marginal tax rate of 35%.
A - Calculate the book-value weights for each source of capital.
B - Calculate the market-value weights for each source of capital.
TMNT Consulting Services has the following capital structure:
A - Calculate the book-value weights for each source of capital.
B - Calculate the market-value weights for each source of capital.
Source
Cost
Common Stock
8.17%
Preferred Stock
7.14%
Debt
7.32%
Method
WACC
Book Value
7.38%
Market Value
7.30%
D - Calculate the weighted average cost of capital using both the book value and market value w
C - Calculate the component costs of capital for each source of capital.
D - Calculate the weighted average cost of capital using both the book value and market value w
C - Calculate the component costs of capital for each source of capital.
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price
mkt valu
30 120,000 70 1,050,000 750 3,750,000 4,920,000 ck
Common Stock
$ 5.00 Dividend
$ 1.25 $ 70.00 Growth Rate
4%
7.14%
Price
$ 30.00 Cost of Common Stock
8.17%
n rate of 6%, and a current price of $750. The bonds pay at $70 per share. The common stock is currently priced at dend by 4% a year from here on out. Assume that TMNT
weights.
weights.
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