MacLeod Industries Finance Assingment Help With Solution

1. Assume you purchased a Microsoft, Inc. bond one year ago for $835.44 when the market rate of interest was 10.25%. This bond matures in 18 years and is contracted to pay a annual coupons at the rate of 8.25%. If the current market rate of interest is 12.5%, what would be the percentage change in bond value from the time you purchased this bond until today?

2. You are considering investing in shares of MacLeod Industries, which is currently trading at $60 per share, just paid a $4.90 dividend, and plans to maintain a 4.10% growth rate in its dividend. You also know that the expected return on the market is 12.00%, the risk free rate is 3.00%, and MacLeod Industries has a beta of 1.15. Should you purchase this stock? Why or Why not?

3. FitTech is considering acquiring Running Gear, Inc. Management believes Running Gear, Inc. can generate cash flows of $387,000, $520,000, and $645,000 over the next three years, respectively. After that time, they feel the business will be worthless. FitTech has determined that a 12.75 percent rate of return is applicable to this potential acquisition. What shouldFitTechbe willing to pay today to acquire Running Gear, Inc.?

4. Explain, in detail, the relationship between interest rates (i.e. yield to maturity) and bond prices. Is now a good time to invest in bonds?

5. You have been hired as a financial advisor to John Lester. He has received two offers the Red Sox and wants to select the best offer. Offer A is a $100m offer for $20m a year for 5 years. Offer B is a $110m offer of $10m a year for four years and $70m in year 5. Assuming a 10.25% discount rate what offer should he choose?

6. When you invest in a stock or a bond, there are two ways for you to make money (i.e. your return comes from two sources). What are these two ways for a stock? How about for a bond?

7. A 1987 advertisement in the New Yorker solicited offers on a 1967 Mercury Cougar XR7 (Motor Trend’s 1967 car of the year) that had been stored un-driven in a climate controlled environment for 20 years. If the original owner paid $4000 for this car in 1967, what price would he have to receive in 1987 to obtain a 9% percent annual return on his investment?

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8. Currently the average house in your town cost $475,000 and is increasing in value by 4.7% per year. In seven years you plan to purchase an average house and will need to have a 20% down payment. If you currently have $5,275 in your investment account, which earns 6.90% a year, how much must you save per month to have your down payment when you buy the house?

9. KL Airlines paid an annual dividend of $1.52 a share last month. The company is planning on paying $1.60, $1.85, and $1.95 a share over the next 3 years, respectively. After that, the dividend will be constant at $2.25 per share per year. What is the market price of this stock if the market rate of return is 9.5 percent?

10. You are looking at a savings account at a bank that pays 5.65% per year. You decide to save $200 every paycheck. If you get paid every 2 weeks, how much do you have in the savings account after 3 years?

11. You just received an insurance settlement offer related to an accident you had six years ago. The offer gives you a choice of one of the following three offers:

You can earn 7.00% on your investments. You do not care if you personally receive the funds or if they are paid to your heirs should you die within the settlement period. Which option should you choose, why?

12. You just purchased a bond that matures in 5 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield (CY) of 8.21%. What is the bond’s yield to maturity? What is the capital gain yield

13. Bauer Inc., just paid a dividend of $1.95 per share and has a beta of 1.14. The expected return on the market is 6.5% and the risk free rate is 2.25%.

a. Assuming a constant dividend growth rate of 3%, what is the value per share of Bauer, Inc.?

b. Bauer, Inc. just announced the development of a new manufacturing process that will significantly decrease cost and increase production. Management anticipates that this new process will double or even triple its profit margin. Therefore, Bauer decided to increase its dividend by 20% each year for the next 6 years. After that time it will decrease its dividend to a constant 3% rate. What is the value per share of Bauer?

c. After further analysis, you realize that instead of immediately dropping to 3% Bauer will slowly decrease its dividend to 3% over 15 years. What is the value per share?

14. You want to buy a house for $100,000. The bank will loan you 85% of the purchase price. The mortgage terms are “30 years, monthly payments, and 9% annual interest rate.” Given this information, how much will your monthly payments be?

15. The common stock of Jensen Shipping has an expected return of 16.3 percent. The return on the market is 10.8 percent and the risk-free rate of return is 3.8 percent. What is the beta of this stock?

16. You are 30 years old and want to retire at 55. However, you do not want to start withdrawing your retirement accounts and social security until 62.You must, therefore, fund 7 years’ worth of living expenses and you estimate you’ll need $5,750/month during that period. If you earn 3% on any money invested in non-retirement accounts during the 55-62 time period and can earn 6% annually on your investments prior to age 55, how much must you invest at the end of each month starting next month to fund your early retirement?

17. You are examining two bonds. Bond A is a 9.875 % coupon semi-annual bond that matures in 20 years. Bond B is a 20 year zero-coupon bond. The yield to maturity for each bond is 7.50% and the par value for each is $1,000.

a. For each bond indicate if it is a premium bond, discount bond, or par bond.

b. What is the current price of each bond?

c. Plot the price path for each bond from now until maturity.

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