辅导 FIN2001 Home Assignment 2讲解 Python程序

FIN2001 Home Assignment 2

You are required to show your work. Providing the final answers alone will not get you full credit.

Question 1 (10 marks)

a. Joe is considering investing in the following bonds issued by SW Corp. which operates in the healthcare sector. Both bonds have a maturity of 5 years and a par value of $1,000 but differ in their coupon payment structures.

•   Bond X pays annual coupons at a rate of 6%.

•   Bond Y pays semi-annual coupons at a rate of 4%.

Given that the yield to maturity (YTM) on both bonds is 5%. Which bond is a premium bond, and which is a discount bond? Explain why. (3 marks)

b. Ethan, a passionate investor in renewable energy, recently secured a large investment to expand his solar panel business. To manage the funds wisely, he hires Ava, a financial consultant, to explore sustainable fixed-income investments. Ava suggests the following bonds from GreenFuture Corp:

- Bond Solar, a medium-term bond with a 10-year maturity, and

- Bond Evergreen, a long-term bond with a 25-year maturity.

Both bonds currently trade at par value of $1,000 and offer a 5.75% annual coupon rate with semiannual payments.

(i) What will be the percentage price change of both Bond Solar and Bond Evergreen if market interest rates suddenly rise by 1%? (5 marks)

(ii) Based on (i), comment on the difference in price sensitivity between medium-term and long-term bonds. (2 marks)

Question 2 (15 marks)

ADY Inc., a prominent player in the financial market, has recently announced updates related to its dividend policies and stock performance. With a strong portfolio of equity and preferred stock offerings, the company continues to attract investors with its diverse investment options.

The company’s Preferred Stock is set to pay an annual dividend of $3.50 in perpetuity, with payments beginning 3 years from now. Investors in this stock can expect a market- required return of 7%.

ADY Class A Common Stock is currently valued at $35 per share. The next dividend payment for this stock is projected to be $1.40 per share, with dividends expected to grow steadily at a constant annual rate of 6% forever.

Meanwhile, its Class B Common Stock presents a more dynamic dividend structure. The stock will pay a dividend of $2.20 next year, followed by an annual growth rate of 9% for the next 2 years. After that, dividends will increase at a slower but steady rate of 4% per year indefinitely. Investors in this stock require a return of 12% to justify their investment in Class B shares.

a. What are the dividend yield, capital gains yield, and total required return for ADY Class A common stock? (3 marks)

b. What is the current price of ADY preferred stock today? (3 marks)

c. If the current market price of ADY Class B common stock is $27 per share, would you buy it? Explain with computations. (9 marks)

You have been recently employed as the financial manager of a firm. In a meeting, your boss has asked you to evaluate the following two mutually exclusive projects (A and B).

Based on your assessment, you believe that Project A is a riskier project, and hence, the appropriate required return should be 12%. In addition, you have determined that the required rate of return for Project B is 10%.

a. Calculate the payback period for each project. (4 marks)

b. Calculate the net present value (NPV) of each project (4 marks)

c. Based on (a) and (b), which project will you finally choose? Explain. (2 marks)

ETH Corp. is considering a new three-year project that requires an initial fixed asset investment of $900,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project requires an initial investment in net working capital of $100,000 which will be recovered at the end of the project’s life. The company has already spent $50,000 on a marketing survey to determine the viability of the new project. No matter whether the new proposal is accepted or not, this survey cost will not be recovered. It is estimated to generate $600,000, $750,000 and $980,000 in annual sales in these 3 years. Besides, it is estimated that the costs will be $200,000, $300,000 and $500,000 respectively in these 3 years. The tax rate is 20 percent.

a.  Prepare the Pro Forma Income Statements for ETH Corp. in these 3 years. (3 marks)

b. Calculate the projected operating cash flows for ETH Corp. in these 3 years. (3 marks)

c.  Copy the following table to your answer sheet and fill in all the blanks. (6 marks)

d. Suppose the required return on the project is 10 percent. What is the net present value (NPV) of the project? Explain whether the company should accept this project. (3 marks)