“GABRIEL RENE MORENO”

AUTONOMOUS UNIVERSITY
“FACULTY OF ACCOUNTING SCIENCES, AUDIT,
MANAGEMENT CONTROL SYSTEMS AND FINANCE”
CAREERS OF: PUBLIC ACCOUNTING AND/OR
INFORMATION AND MANAGEMENT CONTROL

SUBJECT:
“FINANCE II”

ACRONYM:
FIN 500 KK

SEMESTER:
EIGHTH AND NINTH

RESEARCH TOPICS:

“INTERNATIONAL FINANCIAL ENVIRONMENT”

STUDENT : RECORD :
ZARATE FLORES BILMER 216059674

TEACHER:
LIC.AUD. - COSME CAMACHO PATIÑO

AUGUST – 2021
SANTA CRUZ DE LA SIERRA, BOLIVIA
Practical part

Chapter #7

E7.1 A balance sheet balances assets with their sources of debt and equity
financing. If a corporation has assets equal to $5.2 million and a debt ratio of
75.0%, how much debt does the corporation have on its books?
Debt ratio 75% = 0.75
Total assets = $5,200,000.00
Total liabilities = 0.75 (5, 200,000)
Total liabilities = 3,900,000.00
E7.2 Angina, Inc., has 5 million shares outstanding. The company is considering
issuing an additional 1 million shares. After selling these shares at their offering
price of $20 per share and realizing 95% of the proceeds from the sale, the
company is obligated by a prior contract to sell an additional 250,000 shares at
90% of the offering price. In total, how much cash will the company have from the
sale of these shares?

1 ) The equation would be

Total cash = 1,000,000x (20)x(0.95) + 250,000x(20)x(0.90)
Total cash = $23,500,000 -----------> Answer
======================================…
2) Since the company's shares are cumulative, the company must pay its preferred
shareholders 2.5x4 = $10 per share ($7.5 of late dividends in payment plus $2.5 of
the current dividend).
Before paying your common shareholders you must pay your preferred
shareholders 10x750,000 = $7,500,000
Since the company has $12,000,000 to distribute to its shareholders, its common
shareholders will receive the difference i.e. $12,000,000 - $7,500,000 = $4,500,000
Therefore, since there are 3,000,000 common shares, the amount of the dividend
per common share will be
$4,500,000/3,000,000 = $1.5 per share
ANSWER: The amount of dividend per common share that may be paid will be
$1.5 per share.
E7.3 Figúrate Industries has 750,000 cumulative preferred shares outstanding. The
company has not paid the last three quarterly dividends of $2.50 per share and
now (at the end of the current quarter) wants to distribute a total of $12 million to its
shareholders. If Figúrate has 3 million common shares outstanding, what will be
the amount of dividend per common share that it can pay?
$12000000
3000000
The amount of the dividend per share to be distributed is 43.
E7.4 Today Gresham Technology common stock closed at $24.60 per share,
$0.35 less than yesterday. If the company has 4.6 million shares outstanding and
annual earnings of $11.2 million, what is its P/E ratio today? What was your P/E
ratio yesterday?
11.200.000 = 2,43
4.600.000
Today P/E ratio (24.60 x 2.43) = $59.78
Yesterday P/E ratio (24.25 x 2.43) = $58.93
E7.5 Stacker Weight Loss currently pays an annual year-end dividend of $1.20 per
share. It plans to increase this dividend by 5% next year and keep it at that level for
the foreseeable future. If the required return on this company's stock is 8%, what is
the value of Stacker's stock?
Common Share Value
K1
P 0= =13 , 12
K g−G

1 , 20
P 0= =40 $ por accion
0 , 08−0 , 05
E7.6 Brash Corporation initiated a new corporate strategy that indefinitely sets its
annual dividend at $2.25 per share. If the risk-free rate is 4.5% and the risk
premium for Brash stock is 10.8%, what is the value of Brash stock?
Kg = Rf + (bx (km-Rf))

Kg = 4.5+ (1.8x (10.5-4.5))

Kg= 15.3%

The required return is 15.3% of the shares

P7.1 Authorized Shares and Available Shares The charter of Aspin Corporation
authorizes the issuance of 2 million shares of common stock. Currently, there are
1,400,000 shares outstanding, while 100,000 shares are held as treasury shares.
The company wants to raise $48 million for a plant expansion. Talks with
executives at its investment banks indicate that the sale of the new common stock
will net the company $60 per share.

a) What is the maximum number of new common shares that the company can sell
without shareholder authorization?

b) According to the data provided and the results obtained in part a), will the
company be able to raise the necessary funds without authorization?

c) What must the company do to obtain authorization to issue a greater number of

shares than the number calculated in part a)?

Cost of shares 204,000,000

Total stockholders' equity 30,000,000

174.000.000

P7.2 Preferred Dividends Slater Lamp Manufacturing has an outstanding issue of

preferred stock with a par value of $80 and an annual dividend of 11%.

a) What is the annual dividend in dollars? If this is paid quarterly, how much will the
company pay each quarter?

b) If the preferred shares are noncumulative and the board of directors did not pay
preferred dividends for the last three quarters, how much must the company pay to
the preferred shareholders in this quarter before distributing the dividends to the
common shareholders?

c) If the preferred shares are cumulative and the board of directors did not pay the
preferred dividends for the last three quarters, how much must the company pay
the preferred shareholders in this quarter before distributing the dividends to the
common shareholders?

8.300
+150
8450
The community will have to pay 8,950.00 per share if it is cumulative

b) if the company did not opt for accumulation, it would earn 8150

P7.3 Preferred Dividends In each case in the following table, what dollar amount of
preferred dividends per share must be paid to preferred stockholders in the current
period before paying dividends to common stockholders?

a) You could earn $15 on preferred shares

b) You must pay $88 for the preferred shares
c) You must pay 1 of the preferred shares
d) You must pay 53.2 (current $20 and 5)
e) You must pay $28 of the preferred shares

P7.4 Convertible Preferred Stock Valerian Corp.'s convertible preferred stock

has a fixed conversion rate of 5 common shares to 1 preferred share. The
preferred stock pays a dividend of $10.00 per share per year. The common stock
currently sells for $20.00 per share and pays a dividend of $1.00 per share per
year.
 a) Based on the conversion rate and the price of the common stock, what is the
current conversion value of each preferred stock?
b) If the preferred stock sells for $96.00 each, is it convenient for an investor to
convert the preferred stock into common stock?
c) What factors might cause an investor not to convert preferred stock into
common stock?
20000 Shares per year
20000 dividends
P7.5 Common Stock Valuation: Zero Growth Scotto Manufacturing is a mature
company in the machine tool components industry. The most recent dividend on
the company's common stock was $2.40 per share. Due to both its maturity and
stable sales and earnings, the company's management believes that dividends will
remain at the current level for the foreseeable future.
a) If the required return is 12%, what will be the value of Scotto's common stock?
b) If the company's risk as perceived by market participants suddenly increased
causing the required return to increase to 20%, what would be the value of the
common stock?
c) According to the results obtained in parts a) and b) , what effect does risk have
on the value of the shares? Explain your answer.

a) $24%0.12=20 required return 12% value of shares $20

b) $ 24% 0.20=12 the value of the common shares reaches 1.2% as the
percentage increases the value of the shares decreases

P7.6 Common Stock Value: Zero Growth Kelsey Drums, Inc., is a well-
established supplier of fine percussion instruments to orchestras throughout the
United States. The company's Class A common stock paid an annual dividend of
$5.00 per share for the past 15 years. Management expects to continue paying at
the same rate for the foreseeable future. Sally Talbot purchased 100 shares of
Kelsey's Class A common stock 10 years ago when the required rate of return on
the stock was 16%. She wants to sell her shares today. The current required rate
of return on stocks is 12%. What capital gain or loss will Sally realize from her
shares?
E 1
Po=Dx +
t−1 ( 1+k ) t
 1
Po=5 x 100 =$ 113 ,34
( 1+0 , 12 ) 10
1
Po=5 x 100 =$ 160 , 98
( 1+0 , 12 ) 10
He has a profit of $47 from the sale of his shares
P7.7 Valuation of Preferred Stock Jones Design wishes to calculate the value of
its outstanding preferred stock. The preferred stock issue has a par value of $80
and pays an annual dividend of $6.40 per share. Preferred stocks of similar risk
currently earn an annual rate of return of 9.3%.
a ) What is the market value of the preferred shares outstanding?
b ) If an investor buys the preferred stock at the value calculated in part a ) , how
much does he gain or lose per share if he sells the stock when the required return
on preferred stock of similar risk increases to 10.5%? Explain your answer.
$ 5/10,10=5,25 1 10,42
$ 5/0,12=4,67 2
1
Po=6 , 40 x 80 =$ 468 , 43
(1+ 0,093 )
1
Po=6 , 40 x 80 =$ 463 , 35
(1+ 0,106 )

P7.8 Value of Common Stock: Constant Growth Use the constant growth model
(Gordon model) to calculate the value of each company presented in the following
table.

P1
a) Po=
k −g
1 ,20
b) Po A= =24
0 , 13−0 , 08
 4 ,00
c) Po B= =40
0 ,15−0 , 05
0 , 65
d) Po C= =15 , 25
0 , 14−0 , 5
6 ,00
e) Po D= =6 ,00
0 , 09−0 , 08
2 ,25
f) Po E= =18 ,75
0 , 0−0 ,08

P7.9 Common Stock Value: Steady Growth McCracken Roofing, Inc. common
stock paid a dividend of $1.20 per share last year. The company expects its
earnings and dividends to grow at a rate of 5% per year for the foreseeable future.
a ) What required rate of return on these stocks would generate a per share price
of $28?
b ) If McCracken expects its earnings and dividends to grow at an annual rate of
10%, what required rate of return would generate a share price of $28?
P1
Po=
k −g
$ 1, 20
Po=
x ,0 , 25
1 ,20+ 0 ,05
K 1= =0 , 09=¿ 9 %
28
P7.10 Common Stock Value: Steady Growth Elk County Telephone has paid the
dividends presented in the table below for the past 6 years.

The company's dividend per share is expected to be $3.02 next year.

a ) If you can earn 13% on investments of similar risk, what is the most you would
be willing to pay per share?
b ) If you can earn only 10% on investments of similar risk, what is the most you
would be willing to pay per share?
c ) Compare the results obtained in parts a ) and b ) and analyze the effect of
variable risk on the value of the shares.
P1
to) Po(2000)=
k −g
3 , 02
Po ( 2006 )= =29 , 81
0 , 13−0,0257
3 , 02
b) Po ( 2006 )= =42
0 , 10−0,0287
c) The more risk there is, the more valuable the actions are.
P7.11 Common Stock Securities: All Growth Models You are evaluating the
potential purchase of a small business that currently generates $42,500 of after-tax
cash flow ( D 0 = $42,500). Based on a review of similar risk investment
opportunities, you should earn an 18% rate of return from the proposed purchase.
Since you are not very sure about future cash flows, you decide to calculate the
value of the company by assuming some possibilities of the growth rate of cash
flows.
a ) What is the value of the firm if cash flows are expected to grow at an annual
rate of 0% from now on?
b ) What is the value of the company if cash flows are expected to grow at a
constant annual rate of 7% from now on?
c ) What is the value of the company if cash flows are expected to grow at an
annual rate of 12% during the first 2 years and, starting in year 3, the growth rate is
7% constant per year? ?
42.500
a ) Po=Kn=>Po = $ 0 , 18
=$ 23=111

92.500
b) Po=$ 0 , 11
=386.363

P7.12 Free Cash Flow Valuation Nabor Industries is considering going public, but
is unsure of the fair offering price for the company. Before hiring an investment
bank to help them make the public offering, Nabor's managers decided to perform
their own calculation of the value of the company's common stock. The financial
manager gathered the data to perform the valuation using the free cash flow
valuation method. The company's weighted average cost of capital is 11% and has
$1,500,000 of debt at market value and $400,000 of preferred stock at its assumed
market value. The free cash flows calculated for the next 5 years, from 2013 to
2017, are presented below. From 2017 onwards, the company expects its free
cash flow to grow 3% annually.

a) Calculate the value of the entire Nabor Industries company using the free cash
flow valuation model.
b) Use the results you obtained in part a) , together with the data presented above,
to calculate the value of Nabor Industries common stock.
c) If the company plans to issue 200,000 shares of common stock, what is its
estimated value per share?
400.000
to) Po=$
0 , 11−0 , 03

400.000
Po=$ =$ 5.000 .000
0 , 08
The value of the entire company is $5,000,000
5.000 .000
b) Po=$
0 , 11−0 , 03

5.000.000
Po=$ =$ 62.500.000
0 , 08
The value of Nabor industries common stock is $62,500,000

P7.13 Using the Free Cash Flow Valuation Model to Pricing an IPO Suppose
you have the opportunity to purchase the stock of CoolTech, Inc., in an IPO for
$12.50 per share. Although you are very interested in owning the business, you
want to know if it is priced fairly. To determine the value of the stock, you decided
to apply the free cash flow valuation model to the company's financial data that you
obtained from various sources. The following table summarizes the key values you
gathered

.
a) Use the free cash flow valuation model to calculate the value per common share
of CoolTech.
b) According to the results you obtained in part a) and the offer price of the shares,
is it convenient for you to buy them?
c) Upon further analysis, you discover that the FCF growth rate after 2016 will be
3% instead of 2%. What effect would this finding have on your answers to parts a)
and b) ?
618,000
a) P0= 1 PCF value=20014=$600,000+ (I+0.08)= =$ 10.300.000
0 , 06
Total 2013 = $600,000+10,300,000=$10,900,000
$8.228.260-100.000-800.000=7.328.260
7.328.260
Cva= =$ 56 ,37 value for each share
130.000
b) It is advisable to buy 2 shares
P7.14 Valuation Using Price/Earnings Multiples For each of the companies
presented in the following table, use the data provided to calculate its common
stock value using price/earnings (P/E) multiples.

P/Ga=3.00x0.2=$18.6
P/Gb=4.50x10=$45
P/Gc= 1.80X12, 6=$22.68
P/Gd=2.40X8, 9=$21.36
P/Ge=5.10x15, 0=$16.50
P7.15 Management Action and Stock Value REH Corporation's most recent
dividend was $3 per share, its expected annual rate of dividend growth is 5%, and
its required return is now 15%. Management is considering various proposals to
reorient the company's activities. Determine the effect of each of the following
proposed actions on the stock price, and indicate the best alternative.
a ) Do nothing, which will keep key financial variables unchanged.
b ) Invest in a new machine that will increase the dividend growth rate to 6% and
decrease the required return to 14%.
c ) Eliminate an unprofitable product line, which will increase the dividend growth
rate to 7% and increase the required return to 17%.
d ) Merge with another company, which will reduce the growth rate to 4% and
increase the required return to 16%.
e ) Acquire the subsidiary operation of another manufacturing company. The
acquisition should increase the dividend growth rate to 8% and increase the
required yield to 17%.
3
to) Po=$ =30
0 , 15−0 , 05
3
b) Po=$ =10
0 , 17−0 , 07
3
c) Po=$ =0 , 0 , 4=20
0 , 16
3
d) Po=$ =37 , 33
0 , 12−0 , 08
P7.16 Integration: Risk and Valuation Using the following information about
Foster Company, calculate the risk premium for its common stock.
Current price per common stock $50.00
Expected dividend per share next year $3.00
Constant annual dividend growth rate 9%
Risk-free rate of return 7%
K=Rf+ (bx (Km-Kf)
 3% = 7%+(bxn)-9%)
3%-7%=(1/xb)
3%-7%=1%b
7 %−3 %
b=
1%
b=4%
P7.17 Integration: Risk and Valuation Giant Enterprises stock has a required
return of 14.8%. The company, which plans to pay a dividend of $2.60 per share
next year, forecasts that its future dividends will increase at an annual rate
consistent with that experienced during the period 2006 to 2012, when the
following dividends were paid:

a) If the risk-free rate is 10%, what is the risk premium for Giant stock?
b) Using the constant growth model, calculate the value of Giant's stock.
c) Explain what effect, if any, a decrease in the risk premium would have on the
value of Giant's stock.

Ks=10%(1.20+ (14%-10%))
Ks=10%+(1.20-4%)
Ks=10%+1.20-4%=
Ks=6%+1.20
Ks=0.06+1.20
Ks=1.26
01
b) Po=
Ks
2 ,60
Po= 1 ,20 =2.16 $ every action
c) a decrease in the ratio of the required return on common shares
P7.18 Integration: Risk and Valuation Hamlin Steel Company wants to
determine the value of Craft Foundry, a company it plans to acquire for cash.
Hamlin wants to determine the applicable discount rate to use as input in the
constant growth valuation model. Craft shares are not publicly traded. After
studying the required returns of publicly traded companies similar to Craft, Hamlin
believes an appropriate risk premium on Craft stock is about 5%. The risk-free rate
is currently 9%. Craft's dividend per share for each of the past 6 years is shown in
the table below

a ) Since Craft is expected to pay a dividend of $3.68 next year, determine the
maximum cash price that Hamlin should pay for each share of Craft stock.
b ) Describe the effect on the resulting value of Craft of: 1. A decrease in the
growth rate of 2% from that recorded during the period 2007 to 2012. 2. A
decrease in the risk premium to 4%.
Ko=Kf (bx (Km-Kf)
Ks=9%+(1.25/13%)=9%
Ks=9%+1.25-4%
Ks=0.057+1.25=$1.3 For each share
P7.19 ETHICAL PROBLEM Melissa tries to value the shares of Generic Utility,
Inc., whose growth is zero. Generic declared and paid a dividend of $5 last year.
The required rate of return on utility stocks is 11%, but Melissa is unsure of the
integrity of the Generic finance team's financial report, so she decides to consider
an additional “credibility” risk premium. of 1% to the required return as part of your
valuation analysis.
a ) What is the value of Generic's stock, assuming the financial reports are
reliable?
b ) What is the value of Generic stock, assuming Melissa includes the additional
1% “credibility” risk premium?
c ) What is the difference between the values obtained in parts a ) and b ) , and
how would this difference be interpreted?
a) Po=D1/Ks
$5
Po= =45 , 45 $ For every action
0 ,11
$5
b) Po= =41 ,65 $ For every action
0 ,12
c) As we see, the value of each low share will be increased by a share unit of 1%
to the required return.

Chapter #8
P8-1 Rate of Return Douglas Keel, a financial analyst at Orange Industries, wants
to calculate the rate of return on two investments of similar risk, X and Y. Douglas'
research indicates that immediate past returns will serve as reasonable estimates
of future returns. A year earlier, investment X had a market value of $20,000;
Investment Y had a market value of $55,000. During the year, investment X
generated cash flow of $1,500, while investment Y generated cash flow of $6,800.
The current market values of investments X and Y are $21,000 and $55,000
respectively.
a) Calculate the expected rate of return on investments X and Y using the most
recent year's data.
b) If we consider that the two investments have the same risk, which one should
Douglas recommend? Because?
P8-2 Return Calculations For each of the investments presented in the following
table, calculate the rate of return earned during the period, which is not specified.
P8-3 Risk Preferences Sharon Smith, the financial manager of Barnett
Corporation, wants to evaluate three possible investments: X, Y, and Z. Sharon will
evaluate each of these investments to determine if they are better than the
investments the company already has, which have an expected return of 12% and
a standard deviation of 6%. The expected returns and standard deviations of the
investments are as follows:

a) If Sharon were risk neutral, what investment would she choose? Because?
b) If she were risk averse, what investment would she choose? Because?
c) If she were a risk seeker, what investment would she choose? Because?
d) Considering the traditional risk behavior shown by financial managers, which
investment would be preferable? Because?

a) If Sharon were risk neutral, what investment would she choose? Because?
A risk-neutral investor would choose investment X because it only considers the
highest return regardless of its implied risk.
b) If she were risk averse, what investment would she choose? Because?
A risk-averse investor would choose investment X, because its standard deviation
is lower, therefore lower risk.
c) If she were a risk seeker, what investment would she choose? Because?
A risk-preferring investor would choose investment Z because they prefer higher
risk even if its return is low relative to the other investments.
d) Considering the traditional risk behavior shown by financial managers,
which investment would be preferable? Because?
The manager will choose the lowest risk investment X because most people are
risk averse.
P8.4 Risk Analysis Solar Designs plans to make an investment in expanding a
product line. You are considering two possible types of expansion. After
investigating the likely results, the company performed the calculations shown in
the following table.

a) Determine the range of rates of return for each of the two projects.
b) Which of the projects is least risky? Because?
c) If you were to make the investment decision, which of the two would you
choose? Because? What does this mean for your sensitivity to risk?
d) Assume that the most probable outcome of expansion B is 21% per year and
that all other facts remain unchanged. Does this modify your answer to part c) ?
Because?

a) Determine the range of rates of return for each of the two projects.
Interval is the highest annual rate of return minus the lowest rate of return.
Investment A - Interval = 24% - 16% = 8%
Investment B - Interval = 30% - 10% = 10%
b) Which of the projects is least risky? Because?
Project A is less risky, compared to Project B, because the interval is smaller and
this means that its degree of variation will be lower.
c) If you were to make the investment decision, which of the two would you
choose? Because? What does this mean for your sensitivity to risk?
The initial investment is $12,000 for A and B, the decision will depend on my
attitude towards risk, in my case I will choose investment A because in a more
probable scenario I will have a return of 20%, the same as investment b, but in the
different pessimistic and optimistic scenario.
d) Assume that the most probable outcome of expansion B is 21% per year and
that all other facts remain unchanged. Does this modify your answer to part c)?
Because?
I would not change my criteria. I am a risk-averse investor, therefore I stand by my
decision.

P8.5 Risk and Probability Micro-Pub, Inc., is considering the purchase of one of
two microfilm cameras, R and S. Both must provide service for a period of 10 years
and each requires an initial investment of $4,000. Management has prepared the
following table of estimates of rates of return and probabilities of pessimistic, most
likely, and optimistic outcomes.
a ) Determine the interval of the rate of return of each of the two chambers.
b ) Determine the expected performance value of each camera.
c ) Which purchase is the riskiest? Because?

a) Determine the range of the rate of return for each of the two chambers.
Chamber R = 10% (30%-20%)
Chamber S = 20% (35% -15%)

b ) Determine the expected performance value of each camera .

c) Which purchase is the riskiest? Because?

You must calculate the standard deviation, I did it in Excel.

According to the data, camera S is the riskiest as shown by the coefficient of

Variation 0.2623, which is greater than camera R 0.1414. The coefficient of
variation is high which means that the investment has a greater volatility in relation
to its expected return. Also, it could be deduced from the standard deviation.

E8.1 An analyst predicted last year that Logistics, Inc. stock would deliver a total
return of at least 10% next year. At the beginning of the year, the company had a
stock market value of $10 million. At the end of the year it had a market value of
$12 million, although it experienced a loss or negative net income of $2.5 million.
Was the analyst's prediction correct? Explain using total annual return values.
Solution
Total return at least 10% next year .

Kt = -2.5 + 12 – 10 / 10 = -5.00%

With the data given, it can be ensured that the analyst's prediction was erroneous
because the calculated total return is -5%, that is, the shares of Logistics, Inc.
experienced a loss in one year.

E8.2 Four analysts carry out the valuation of Fluorine Chemical shares. One
predicts a 5% return for next year. The second expects a negative return of 5%.
The third predicts a 10% return. The fourth expects a 3% return for next year. You
are confident that the return will be positive, but not high, and you arbitrarily assign
probabilities of 35, 5, 20, and 40%, respectively, that the analysts' forecasts are
correct. Considering these probabilities, what is Fluorine Chemical's expected
performance for the next year?
Solution

The expected return for next year is 6.6%, considering forecasts and probabilities.
E8.3 The expected annual returns are 15% for investment 1 and 12% for
investment 2. The standard deviation of the return for the first investment is 10%;
The return on the second investment has a standard deviation of 5%.
Solution
Which investment is least risky taking into account only the standard deviation?
Investment 2 is the one with the least risk because it reflects less dispersion
around its expected return.
Which investment is least risky based on the coefficient of variation?
Investment 2 is the least risky because the return is lower compared to investment
1, therefore, the risk is lower and in turn the coefficient of variation indicates the
relative dispersion measure of an investment.
Which is a better measure considering that the expected returns of the two
investments are not equal?
The best measure is the coefficient of variation because it is useful for comparing
the risks of assets with different expected returns. The standard deviation is not
useful for comparing two investments with different returns but it is useful for
comparing equal returns.
E8.4 Your portfolio has three asset classes. U.S. Treasury bills make up 45% of
the portfolio, large company stocks make up another 40%, and small company
stocks make up the remaining 15%. If the expected returns are 3.8% for Treasury
bills, 12.3% for large company stocks, and 17.4% for small company stocks.

Solution

The proportion of each asset does not represent probabilities, keep in mind.

What is the expected return of the portfolio?

The expected return of the portfolio is 9.24%
E8.5 You want to calculate the risk level of your portfolio based on its beta
coefficient. The five stocks in the portfolio, with their respective proportions and
beta coefficients, are indicated in the following table. Calculate the beta coefficient
of your portfolio.

Portfolio beta coefficient, formula:

E8.6 a) Calculate the required rate of return of an asset that has a beta coefficient
of 1.8, considering a risk-free rate of 5% and a market return of 10%. b) If investors
have increased their risk aversion due to recent political events, and the market
return has increased to 13%, what is the required rate of return for the same
asset?
c) Use the results you obtained in part a) to graph the initial stock market line
(SML), and then use the results you obtained in part b) to graph (on the same
axes) the change in the SML .

a) Expected return on the Asset = 5% + 1.8*(10%-5%) = 14%

If you change the market return from 10% to 13%, then Expected return is now
19.40%(b)
c) graph.
Chapter #9

E9.1 A company raises capital by selling $20,000 of debt, with flotation costs equal
to 2% of its par value. If the debt matures in 10 years and has a coupon rate of 8%,
what is the RAV of the bond?

We calculate the discount rate that equates the present value of the outputs
with the initial input.
E9.2 Your company, People's Consulting Group, was asked to advise on a Brave
New World preferred stock offering. This preferred stock issue with a 15% annual
dividend would sell at its par value of $35 per share. Flotation costs would reach $3
per share. Calculate the cost of these preferred shares.

Dp
Kp=
Np

E9.3 Duke Energy has paid dividends consistently for 20 years. In that time,
dividends have grown at a compound annual rate of 7%. If Duke Energy's current
stock price is $78 and the company plans to pay a dividend of $6.50 next year,
what is the cost of capital for Duke's common stock?

6.50x (1+0.07)+0.07
78
=6.50 (1.07)+0.07
78
=6.955+0.07
78
=0.0891+0.07
=0.15916x100
=15.92%

E9.4 Weekend Warriors, Inc., has a capital structure consisting of 35% debt and
65% equity. The company's estimated after-tax cost of debt is 8% and its estimated
cost of equity capital is 13%. Determine the weighted average cost of capital
(WACC) of the company.

Calculation of the Weighted Average Cost of Capital:

Source of % Source Cost of CPPC

Financing Financing

Suppliers 35% 8% 2.8

Equity 65% 13% 8.45

TOTAL 100 11.25

Steps to calculate the CPPC:

1.- The Weighted Average Cost of each source is calculated, multiplying the
Financing Cost by the % that the source represents. Example: Suppliers 8 * 35% =
2.8

2.- The Weighted Average Costs of each financing source are added: 2.8 + 8.45 =
11.25.

Weighted Average Capital Cost of the project: 2.8 + 8.45 = 11.25

E9.5 Oxy Corporation uses debt, preferred stock, and common stock to raise
capital. The company's capital structure targets the following proportions: debt,
55%; preferred stock, 10%; and common shares, 35%. If the cost of debt is 6.7%,
the cost of preferred stock is 9.2%, and the cost of common stock is 10.6%, what is
Oxy's weighted average cost of capital (WACC)?

8.32%

Step-by-step explanation:

Source of capital Amount Goal % Cost % Calculation

LP Debt 55.00% 6.70% 3.69%

Preferred Shares 10.00% 9.20% 0.92%

Common Shares 35.00% 10.60% 3.71%

Acumulated utilities

Chapter 6
P6.1 Yield Curve A company that wants to evaluate the behavior of interest rates
collected yield data on five U.S. Treasury securities, each with a different maturity
and all measured on the same date. The summarized data is as follows.

a ) Draw the yield curve related to these data.

b ) Describe the yield curve resulting from part a ) and explain the general
expectations contained in it.

Nominal rates

Real interest rate = (K)

K1=k+Ip+Rp

Rp

K= K1-Ip

Nominal rate (K) Nominal Rate (K) IP Real interest rate

TO 12,6% 9,5% 3,01%
b 11,2% 8,2% 3,02%
c 13,0% 10,0% 3,02%
d 11,0% 8,1% 2,9%
AND 11,4% 8,3% 3,7%

The real interest rate decreases from January remained stable from March to
August and finally increased in December force that was responsible for a change
in the real rate include changing economic conditions such as international trade.

performance curve
The yield curve is slightly sloped downward which reflects lower interest rates
expected in the future. The curve may reflect general expectation for an economic
recovery due to upcoming inflation.

P6-2 Term Structure of Interest Rates Yield data for several top-quality corporate
bonds were recorded at each of the three indicated times.

a) On the same series of axles, draw the performance curve for each of the three
times indicated.

b) Identify each curve in part a) with its general shape (downward slope, upward
slope, or flat curve).

c) Describe the general expectation of the existing interest rate in each of the three
times.
d) Examine data from 5 years ago. According to expectations theory, what
approximate return would investors expect a 5-year bond to pay today?

Yield Curve of High Quality Bonds Comparative

The yield curve will be 5 years full of relatively, extremely descending financial
costs, which indicates that in the short term over time they are higher than the
long-term rates, the yield curve precedes the short-term financing costs. than long-
term financing costs.

P6.3 Risk-free rate and risk premiums The real interest rate is currently 3%; The
inflation expectation and risk premiums of various securities are as follows.

a) Calculate the risk-free interest rate, RF, applicable to each security.

b) Although not indicated, what factor should be the cause of the different risk-free
rates calculated in part a) ?

c) Calculate the nominal interest rate of each security.

a) Risk-free rate Rf=Kk+Ip

 Security K IP RF
TO 3% 6% 9%
b 3% 9% 12%
c 3% 8% 11%
d 3% 5% 8%
AND 3% 11% 14%

b) From the expected inflation rate different probable the maturity of each security
behind.

c) Nominal rate K=Kk+Ip+Rp

Nominal rate K IP Rp K
TO 3% 6% 3%=12%
b 3% 9% 2%=4%
c 3% 8% 2%=13%
d 3% 5% 4%=12%
AND 3% 11% 1%=15%

P6.4 Bond Quote and Yields Assume that Financial Management Corporation's
bond with a par value of $1,000 had a coupon rate of 5.700%, maturity on May 15,
2020, a current price quote of 97.708, and a yield to maturity (RAV) of 6.034%.
Based on this information, answer the following questions:

a ) What was the dollar price of the bond?

b ) What is the current yield of the bond?

c ) Is the sale of the bond at par, at a discount, or at a premium? Because?

d ) Compare the current yield of the bond calculated in part b ) with its RAV and
explain why they are different.

Bond Quote

A) 100.25x1000=$100,250
B) The yield is $1000,250
C) 8,34%
D) 200 Sol.

P6.5 Valuation Fundamentals Imagine you are trying to evaluate the financial
aspects of purchasing a car. You expect the car to provide annual after-tax cash
income of $1,200 at the end of each year, and assume that you can sell the car for
after-tax income of $5,000 at the end of the planned 5-year ownership period. All
funds for the car purchase will come from your savings, which currently earn 6%
after taxes.

a) Identify the cash flows, the timing of their occurrence, and the required return
applicable to the valuation of the automobile.

b) What is the maximum price you would be willing to pay to purchase the car?

Explain your answer.

Fund flow CF=$1200

Cf Cf 2 Cf 3 Cf 4 Cf 5
Vo= + + + +
(1+k ) (1+ k )2 (1+k )3 ( 1+ k ) 4 (1+k )5

1120 1200 1200 1200 1200

Vo= + + + +
(1+0 , 06) (1+ 0 ,06)2 (1+0 , 06)3 (1+0 , 06)4 (1+ 0 ,06)5

Vo=5054.83%

The maximum price you should be willing to pay for the car is $5054. If you pay
more than that amount you would be working out less than 16% profitability.

P6.6 Asset Valuation Using the information in the following table, calculate the
value of each asset.