Quiz 5:
Principles of Finance
YIELD TO MATURITY (YTM)
=INTEREST (1-TAX) + (MV-BO) / N) / (MV + BO) /2
WHERE INTEREST = 1000 * 6% / 2 =30
TAX RATE = 20%
MV = MATURITY VALUE = 1000
LET ASSUME BOND MATURE AT PAR VALUE
BO=CURRENT PRICE = 860
N = NUMBER OF YEARS = 15 YEARS * 2 =30
YTM= (30 (1-0.20) + (1000-860)/30] + (1000 + 860) / 2
= 28.67 / 930
= 3.08 %
USING MM APPROACH
PO = P1 + D1 / (1+K)
WHERE PO = LAST PRICE
P1 = CURRENT PRICE
51=P1+5.6/ (1+0.107)
P1=50.857 PER SHARE
VALUE OF EQUITY=50.857 * 5 MILLION SHARES =254.285 MILLION
COST OF EQUITY = DPS/MPS
TOTAL EARNING =28MILLION
EPS = 28MILLION / 5 MILLION
= 5.6 PER SHARE
CONSIDERING WHOLE EARNING IS DISTRIBUTED AS DIVIDEND-
COST OF EQUITY = 5.6 / 51
= 10.98%
VALUE OF EQUITY = 5 MILLION * 51 = 255 MILLION
VALUE OF DEBT = 15 MILLION
TOTAL VALUE = 255 + 15 = 270
WACC=WE * KE + WD * KD = 255 /270 8 10.98% + 15/270 * 6% =10.7%
NOW K = RF +B (RM-RF)
10.7= 2+B (15-2)
B OR BETA = 0.67
THAT THE FIRMS CAPITAL STRUCTURE DOES NOT AFFECT ITS VALUE.
Yes, the table shows the possible outcomes of probability for the different states the economy can be in.
Yes. This table shows the rate of return for the investors depending on which state the economy is in.
This representation shows the probable rate of return during the different stages of the economy. These statistics are helpful in determining risk for investors.
No. These figures are only predictions and not an accurate representation of the outcomes given specific variables.
What are the required rates of return for these assets according to CAPM, where E(Rm)=12%, risk-free rate is 3%? Why do you call them the required rates of returns?
Table 1:
States of the economy
Probability
Ra
Rb
Rc
Rd
Recession
1/6
-30%
-25%
15%
2%
Recovery
1/3
12%
6%
6%
2%
Boom
?
60%
30%
15%
2%
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