Calculate the value of a firm through the use of discounted cash flow analysis.
Yield to Maturity and Required Rate of Return
A company is like a portfolio of projects. It is important to determine each project’s contributions to risk of the company’s cash flows.
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This assignment is assessing learning outcome:
Calculate the value of a firm through the use of discounted cash flow analysis.
Problems:
1. Complete problem: Yield to Maturity for Annual Payments
XYZ Corporation’s bonds have 14 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $950. What is their yield to maturity? Show your work.
Complete problem: Required Rate of Return
Show your work.
Suppose rRF = 5%, rM = 10%, and rA = 12%.
a. Calculate Stock A’s beta.
b. If Stock A’s beta were 2.0, then what would be A’s new required rate of return?
2. Complete problem: Portfolio Beta
You have a $4 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta of 1.1. You are considering selling $100,000 worth of one stock with a beta of 0.9 and using the proceeds to purchase another stock with a beta of 1.4. What will the portfolio’s new beta be after these transactions? Show your work.
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