Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 12, Problem 14P
In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.05%.
- a. What is the highest expected return these bonds could have?
- b. At the time, similar maturity Treasuries have a yield of 1.5%. Could these bonds actually have an expected return equal to your answer in part (a)?
- c. If you believe Ralston Purina’s bonds have 0.5% chance of default per year, and that expected loss rate in the event of default is 60%, what is your estimate or the expected return for these bonds?
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Please answer to question (c)
In mid-2021, Rockebakker River (RR) had AA-rated, 10-year bonds outstanding with a yield to maturity of 1.52%.
a. What is the highest expected return RR's bonds could have?
b. At the time, similar maturity Treasuries had a yield of 0.52%. Could RR's bonds actually have an expected return equal to your answer in part (a)?
c. If you believe RR's bonds have 0.8% chance of default per year, and that expected loss rate in the event of default is 50%, what is your estimate of the expected
return for these bonds?
.....
a. What is the highest expected return these bonds could have?
The highest expected return these bonds could have is %. (Round to two decimal places.)
b. At the time, similar maturity Treasuries had a yield of 0.52%. Could RR's bonds actually have an expected return equal to your answer in part (a)? (Select the best
choice below.)
O A. No, if the bonds are risk-free, the expected return equals the risk-free rate, and if they are not risk-free the expected return is less than…
In mid-2009, Rite Aid had CCC-rated,19-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 3%. Suppose the market risk premium is 6 % and you believe Rite Aid's bonds have a beta of 0.39. The expected loss rate of these bonds in the event of default is 55%.
a. What annual probability of default would be consistent with the yield to maturity of these bonds in mid-2009?
The required return for this investment is_______%.(Round to two decimal places.)
The annual probability of default is _____%. (Round to two decimal places.)
b. In mid-2015, Rite-Aid's bonds had a yield of 6.7%, while similar maturity Treasuries had a yield of 1.7%. What probability of default would you estimate now?
The probability of default will be_____%. (Round to two decimal places.)
Chapter 12 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 12.1 - According to the CAPM, we can determine the cost...Ch. 12.1 - What inputs do we need to estimate a firms equity...Ch. 12.2 - How do you determine the weight of a stock in the...Ch. 12.2 - Prob. 2CCCh. 12.2 - Prob. 3CCCh. 12.3 - How can you estimate a stocks beta from historical...Ch. 12.3 - How do we define a stocks alpha, and what is its...Ch. 12.4 - Why does the yield to maturity of a firms debt...Ch. 12.4 - Prob. 2CCCh. 12.5 - What data can we use to estimate the beta of a...
Ch. 12.5 - Prob. 2CCCh. 12.6 - Why might projects within the same firm have...Ch. 12.6 - Under what conditions can we evaluate a project...Ch. 12.7 - Prob. 1CCCh. 12.7 - Prob. 2CCCh. 12 - Prob. 1PCh. 12 - Suppose the market portfolio has an expected...Ch. 12 - Prob. 3PCh. 12 - Suppose all possible investment opportunities in...Ch. 12 - Using the data in Problem 4, suppose you are...Ch. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Suppose that in place of the SP 500, you wanted to...Ch. 12 - Prob. 9PCh. 12 - You need to estimate the equity cost or capital...Ch. 12 - In mid-2012, Ralston Purina had AA-rated, 10-year...Ch. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Your firm is planning to invest in an automated...Ch. 12 - Consider the setting of Problem 18. You decided to...Ch. 12 - Prob. 20PCh. 12 - In mid-2015, Cisco Systems had a market...Ch. 12 - Weston Enterprises is an all-equity firm with two...Ch. 12 - Prob. 24PCh. 12 - Your company operates a steel plant. On average,...Ch. 12 - Prob. 26PCh. 12 - You would like to estimate the weighted average...
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