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You expect General Motors (GM) to have a beta of 1.5 over th…

You expect General Motors (GM) to have a beta of 1.5 over the next year and the beta of Exxon Mobil (XOM) to be 1.9 over the next year. Also, you expect the volatility of General Motors to be 50% and that of Exxon Mobil to be 35% over the next year. Which stock has more systematic risk? Which stock has more total risk?

1. (Bonds) HMK Enterprises would like to raise $10 million t…

1. (Bonds) HMK Enterprises would like to raise $10 million to invest in capital expenditure. The company plans to issue five-year bonds with a face value of $1000 and a coupon rate of 6.5% (annual payments). The following table summarizes the yield to maturity for five-year (annual-pay) coupon corporate bonds of various ratings: Rating AAA AA A BBB BB Yield to maturity 6.20% 6.30% 6.50% 6.90% 7.50% (4 points) Assuming the bonds will be rated AA, what will the price of the bonds be?  (2 points) What must the rating of the bonds be for them to sell at par? Explain. (4 points) Suppose that when the bonds are issued, the price of each bond is $959.54. What is the likely rating of the bonds? Are they junk bonds?    2. (Stocks) Answer the two questions (A and B) below. (7 points) A company has just paid a dividend of $2 per share yesterday. It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, and then the dividend will grow at a constant rate of 7% thereafter. The company’s stock has a beta equal to 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s price today? (3 points) A company has stock which costs $42.00 per share and pays a dividend of $2.50 per share at the end of this year. Future dividends are paid annually and are expected to grow at a constant rate. If the discount rate is 8%, what is the expected annual growth rate of the company’s dividends?   3. (Projects) You are choosing between two projects, but can only take one. The cash flows for the projects are given in the following table:   0 1 2 3 4 A -$50 25 20 20 15 B -$100 20 40 50 60 (3 points) What are the IRRs of the two projects? (3 points) If your discount rate is 5%, what are the NPVs of the two projects? (3 points) What is the payback period of the two projects? (1 point) What should you do? Make sure you have read the instructions above the question before you begin writing your answers.

1. (Bonds) Answer the two questions (A and B) below. A. (6…

1. (Bonds) Answer the two questions (A and B) below. A. (6 points) Lloyd Industries raised $28 million in order to upgrade its roller kiln furnace for the production of ceramic tile. The company funded this by issuing 15-year bonds with a face value of $1000 and a coupon rate of 6.2%, paid annually. The below table shows the yield to maturity for similar 15-year corporate bonds of different ratings issued at the same time. When Lloyd Industries issued their bonds, they received a price of $962.63. What is most likely to be the rating these bonds received?  Security AAA Corporate AA Corporate A Corporate BBB Corporate BB Corporate Yield (%) 5.70% 5.80 6.00% 6.60% 6.90% B. (4 points) The yield to maturity of a $1000 bond with a 7% coupon rate, semiannual coupons, and two years to maturity is 7.6%. What must its price be?   2. (Stocks) Answer the two questions (A and B) below. (7 points) Simpkins Corporation is expanding rapidly, and it currently needs to retain all of its earnings; hence it does not pay any dividends. However, investors expect Simpkins to begin paying dividends, with the first dividend of $1.00 coming 3 years from today. The dividend should grow rapidly – at a rate of 50% per year – during Years 4 and 5. After Year 5, the earnings and dividends are expected to grow at a constant rate of 8% per year. The company’s stock has a beta equal to 0.9, the risk-free rate is 5.6%, and the market risk premium is 6%. What is your estimate of the stock’s price today?  (3 points) The Sisyphean Company’s stock is currently trading for $25.00 per share. The stock is expected to pay a $2.50 dividend at the end of the year and the required rate of return for Sisyphean Company’s stock is 14%. If the dividends are expected to grow at a constant rate, then what is the expected growth rate in the Sisyphean Company’s dividends?   3. (Projects) You are considering the following two projects, but can only take one. Your discount rate is 11%. The cash flows for the projects are given in the following table:  Project 0 1 2 3 4 A -$100 25 30 40 50 B -$100 50 40 30 20 (3 points) What are the IRRs of the two projects? (3 points) If your discount rate is 7%, what are the NPVs of the two projects? (3 points) What is the payback period of the two projects? (1 point) What should you do? Make sure you have read the instructions above the question before you begin writing your answers.