Q1: An investor buys a 5-year real return bond (par value = $1,000), which offers a coupon rate = 5%. Inflation rates for years 1-5 (inclusive) are: 3%, 6%, 5%, 4%, and 2%, respectively. Calculate the nominal and real rates of return (I suggest using a chart as we did in class).
Q2: A co. has 1,000,000 shares (O/S), and decides to issue an additional 500,000 shares at $100 - on the first day of trading, the co.'s stock jumps to $160 (based on investor enthusiasm) - what is the opportunity cost to existing investors, if the stock is initially priced at $160, rather than $100?
Q3: IMB Inc. assets and liabilities total $600MM and $180MM, respectively; its cost of debt = 6%. IMB Inc.'s stock Beta = 1.20, and the return on underlying market (s) = 9%. You notice that 90-day Treasury Bills pay 4%, while local municipal bonds yield 5%. Last year, IMB Inc. paid $20MM in taxes on earnings before taxes of $100MM - what is IMB Inc.'s WACC?
Q4: WXB Inc., whose tax rate is 25%, has 6.5MM preferred shares outstanding, priced at $15 (dividend = $1.25), and 80MM common shares outstanding, priced at $14. Its debt structure is split between LT bonds (10-year bonds, coupon rate = 6%, issue/quoted price = $920) and debt, totaling $120MM and $150MM, respectively. WXB Inc.'s stock beta is 1.5, and the underlying stock market's return = 10%. If the risk-free rate = 4%, what is WXB Inc.'s weighted average cost of capital?
Q5: WXB Inc. reports the following cash flows:
able[[Years, 1, 2, 3, 4, 5],[FCFs ($MM), -50.6, -63.2, -87.7, +40.5, +98.7]]
Using a 4-year planning horizon, and the cost of capital computed in Q4, what is the value of WXB Inc.'s business (assume a constant growth rate after year 4 = 4%)?
