Calculations Shown

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1) Company XYZ is currently trading at $97.00 a share. The expected growth rate is 4% and the Required Rate of Return is 7.8%. Calculate the next annual dividend amount using the Constant Dividend Growth Model.

Note: D0 = current dividend; D1 = next annual dividend

D1 = P0 (k – g)

= ($97) (0.078 – 0.04)

= $3.686/share

Is this the correct answer? If not, please explain in detail.

#2) Find the Yield to Call on a semiannual coupon bond with a price of $1,085, a

Face Value of $1,000, a call price of $1,067, a coupon rate of 6.75%, 18 years remaining until maturity, 11 years remaining until the call date.

Textbook Essentials of Investments, 9th edition, Bodie, 2013 Chapter 10 – Page 306

Even with the textbook explanation, I could not understand how to solve this problem. Can you explain in detail?

#3) An investor purchases 300 shares of ABC stock for a $15 a share and immediately sells 2 covered call contracts at a strike price of $20 a share. The premium is $2 a share. What is the maximum profit and loss?

Maximum Profit:

(Strike Price – Stock Purchase Price + Premium) (# shares purchased)

($20 – $15 + $2)(300) = $2,100

Maximum Loss: (Stock Purchase Price – Premium) (# shares purchased)

($15 – $2) (300) = $3,900

Is this the correct answer and method? If not, please explain in detail.

#4) You are an analyst comparing the performance of 2 portfolio managers using the Sharpe Ratio measurement. Manager A shows a return of 16% with a standard deviation of 10% while manager B shows a return of 12% with a standard deviation of 6%. If the risk-free rate is 5%, which manager has the better risk adjusted return?

Sharpe Ratio = S = (Ri – rf)/standard deviation

Ri = Portfolio Return

rf = Risk-Free Rate

 

Sharpe Ratio (A) = (0.16 – 0.05)/0.10 = 1.1

Sharpe Ratio (B) = (0.12 – 0.05)/0.06 = 1.167 (rounded)

Manager (B) has the better adjusted return because the higher Sharpe ratio indicates that his portfolio has a lower yield but with a much lower risk than Manager (A).

Is this the correct answer and is the analysis also correct? If not, please explain in detail.

 

#5) Look at the following Balance Sheet and Income Statement and calculate the following ratios: Profit Margin, Return on Assets, Return on Equity.

1998 (Millions $) Balance Sheet

Assets

Current Assets

Cash $700

Accounts Receivable $400

Inventory $200

Total Current Assets $1,300

Fixed Assets

Property, Plant, Equipment $2,000

LESS: Accumulated Depreciation $500

Total Fixed Assets $1,500

Liabilities & Owners Equity (1998)

Current

Accounts Payable $700

Notes Payable $300

Total $1,000

Long Term

Long Term Debt $700

Total $700

 

Stockholders’ Equity (1998)

Common Stock ($1 Par) $100

Capital Surplus $100

Retained Earnings $900

Total Owners’ equity $1,100

 

Total Liabilities & Stockholders’ Equity $2,800

 

 

Income Statement (1998 Millions $)

Sales $600

Cost of Goods Sold $400

Administrative Expenses $100

Depreciation $510

Earnings Before Interest & Taxes (EBIT) -$410

Interest Expense $30

Taxable Income -$440

Taxes -$50

Net Income -$390

Dividends $0

Addition to Retained Earnings -$390

 

Other Information

# Shares Outstanding (millions) 100

Price per share $18.86

 

Profit Margin = Net Income / Net Sales (revenue)

-$390/$600 = -0.65

 

ROA = Net Income / Total Assets

-$390/$2,800 = -0.1392

 

ROE = Net Income / Shareholders’ Equity

-$390/$1,100 = -0.3545

Are these answers correct and is the analysis correct? If not, please explain in detail.

 

#6) Find the Intrinsic Value of the stock of Company ABC using the following data:

Risk-Free Rate = 5%

Market Risk Premium = 8%

Expected Market Return = Risk-Free Rate + Market Risk Premium

Beta = 0.9

ROE = 12.5%

Dividend Payout Ratio = 0.22

Dividends for the next 4 years are expected to be: 0.59, 0.67, 0.76, 0.85

 

Subsequent Growth will be at the computed growth rate (g)