#### Description

##### Strategic Financial Management 5 & 6

Description

Question

5-10
The Brownstone Corporation’s bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a \$1,000 par value, and the coupon interest rate is 9%.
a.
What is the yield to maturity at a current market price of (1) \$829 or (2) \$1,104?
b.
Would you pay \$829 for one of those bonds if you thought that the appropriate rate of interest was 12%-that is, if r d = 12%? Explain your answer.
5-21
Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a \$1, 000 par value, a 10% coupon rate, and semiannual interest payments.
a.
Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell?
b.
Suppose that, 2 years after the initial offering, the going interest rate had risen to 12%. At what price would the bonds sell?
c.
Suppose, as in part a, that interest rates fell to 6% 2 years after the issue date. Suppose further that the interest rate remained at 6% for the next 8 years. What would happen to the price of the bonds over time?
6-7
Suppose rRF= 9%, r m = 14%, and bi = 1.3
a.
What is ri, the required rate of return on Stock i?
b.
Now suppose rRF (1) increases to 10% or (2) decreases to 8 %. The slope of the SML remains constant. How would this affect rM and ri?
c.
Now assume rRFremains at 9% but rm (1) increases to 16% or (2) falls to 13%. The slope of the SML does not remain constant. How would these changes affect ri?
6-9
Suppose you manage a \$4 million fund that consists of four stocks with the following investments
Stock
Investment
Beta
A
\$4000,000
1.50
B
600,000
-0.50
C
1,000,000
1.25
D
2,000,000
0.75
If the market’s required rate of return is 14% and the risk-free rate is 6%, what is the fund’s required rate of return.

Solution ID:436816 | This paper was updated on 26-Nov-2015

Price : \$32