FIN3150 Suffolk University ABC Company Principle of Finance Questions

1. Company ABC trades in the stock market. Its β = 1. The market portfolio return is 12%. What is the expected return on company’s stock?

2. Yo are going to receive dividends from company ABC in years 1 and 2. After that the company will disappear. The dividends will be $100 in every period. What is the price of the company’s stock if you use the information from the previous question? Suppose now that the company will pay $100 in dividends but for 10 years. What is the new price? What is the price of the company if this pays $100 per period, forever?

3. You buy an apartment for investment in a very good area so you know this will be most of the time with tenants. The monthly rent you charge to the tenants is $5,000. You set in the contract a rate of increase in the rent of 5% per year. What should be the price of the department today? Use a 10% annual discount rate.

4. You bought 100 stocks from company XYZ. The company will pay dividends per 20 years starting at year 1. After that the company will disappear. The discount rate for company XYZ is 12%. What is the price of the company today? What would be the price today if the company pays dividends for 20 years but starting at year 3?

5. You have a 2-year zero coupon bond that pays $100, which price today is $79.72. In the market there is a two year 5% coupon bond with principal of $100, as well. The

spot rate for 1 year is r1 = 3%.

(a) What is the price today of the coupon bond?

(b) What is yield to maturity (YTM) of every bond?

(c) What is the duration of every bond?

(d) What is the modified duration of every bond?

(e) Using the previous information, what is the percentage change in the price of every bond if there is a 1% change in the yield?

6. Explain in detail what is the mechanism the Central Bank uses to either decrease or increase the monetary policy rate.

7. Suppose you want to use the CAPM model to estimate the discount rate of a company in order to discount its cash flows but that company does not trade in the stock market. What would be the problem in using the CAPM, What would you do in order to solve the problem?

8. You have a 1-year zero coupon bond that pays $1 at maturity. The price today is $0.971. You have a two-year zero coupon bond that pays $1 at maturity. Its price is $0.907. What is the term structure of interest rates?

9. You bought a house and you plan to sell this in year 10. the monthly rent is $2,000 and it grows at a rate of 4% per year. The discount rate is 8% annual. What is the price of the house today? What will be the price you will sell the house in year 10?

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