FNCE 401v6-problems

Problem 3A newly issued bond has the following characteristics:Par value = $1000Coupon rate = 8%Yield to Maturity = 8%Time to maturity = 15 yearsDuration = 10 years1. Calculate modified duration using the information above.2. If the yield to maturity increases to 8.5%, what will be the change (in dollaramount) in bond price?3. Identify the direction of change in modified duration if:i. the coupon of the bond is 4%, not 8%.ii. the maturity of the bond is 7 years, not 15 years.4. How can you construct a portfolio with a duration of 8 years using this bond anda 5 year zero coupon bond?Problem 5Company HTA had a free cash flow for the firm (FCFF) of $1,500,000 last year. It isexpected the FCFF will keep a sustainable growth rate of 5%. The company has 2million common shares outstanding. In addition, the following information has beengathered:Capital structure: D/E=0.2:0.8;Market value of Debt: VD =$5,000,000;Required return on equity: kE =15%Cost of debt before tax =6%Tax rate: tc =25%;Determine the fair value of HTA stock.FNCE 401v6Assignment 3Oct 9/2013Problem 6Company JUK has a ROE of 25% and the company will not pay any dividend for thenext 3 years. It is estimated that the company will pay $2 dividend per share after threeyears and then to level off to 5% per year forever.The company has a beta of 2. Assume the risk-free interest rate is 4%, and the marketrisk premium is 8%.1. What is your estimate of the fair price of a share of the stock?2. If the market price of a share is equal to this intrinsic value, what is the P/E ratio?3. What do you expect its price to be 1 year from now? Is the implied capital gainconsistent with your estimate of the dividend yield and the market capitalizationrate?Problem 7MicroSense, Inc., paid $2 dividends per share last year. It is estimated that thecompanys ROEs will be 12% and 10%, respectively, next two years. The plowback ratein next two years will be 0.6. It is expected that the dividends will grow at a sustainablerate of 3% per year after two years. Assume that the expected return on the market is8%, the risk-free rate is 4%, and the beta of the stock is 1.4. What is the fair price of thestock?2Problem 8An analyst uses the constant growth model to evaluate a company with the followingdata for a company:Leverage ratio (asset/equity): 1.8Total asset turnover:1.5Current ratio: 1.8Net profit margin: 8%Dividend payout ratio: 40%Earnings per share in the past year: $0.85The required rate on equity: 15%Based on an analysis, the growth rate of the company will drop by 25 percent per year inthe next two years and then keep it afterward. Assume that the company will keep itsdividend policy unchanged.1. Determine the growth rate of the company for each of next three years.2. Use the multi-period DDM to estimate the intrinsic value of the companys stock.3. Suppose after one year, everything else will be unchanged but the required rateon equity will decrease to 14%. What would be your holding period return for theyear?FNCE 401v6