Week 1 Discussion - Answer both of the questions in detail of 1 page each. Question 1: Consider the bonds of IBM: coupon 1%, term 3 years, issued in August 2010. Why do investors buy these bonds with...

Week 1 Discussion - Answer both of the questions in detail of 1 page each.


Question 1:
Consider the bonds of IBM: coupon 1%, term 3 years, issued in August 2010. Why do investors buy these bonds with only 1% rate of return? Give some reasons to justify your answer.

Question 2:
IBM stock sells at about $195 per share and pays an annual dividend of $3.40. What is its annual dividend yield? Would you rather buy the stock or the bonds of IBM? Give some reasons.




Week 1 Discussion - Answer both of the questions in detail of 1 page each. Question 1: Consider the bonds of IBM: coupon 1%, term 3 years, issued in August 2010. Why do investors buy these bonds with only 1% rate of return? Give some reasons to justify your answer. Question 2: IBM stock sells at about $195 per share and pays an annual dividend of $3.40. What is its annual dividend yield? Would you rather buy the stock or the bonds of IBM? Give some reasons. Week 1 Individual Assignment I have solved the first problem for you. Please use this as a model to show the details of the calculations and the logic in your procedure. The answers to the problems are given for your guidance. Getting the right answer is not enough. Note the following: 1. Please include the statement of the problem with the solution. 2. Write a financial principle to start your problem. For example, The PV of a loan is equal to the PV of installments, properly discounted. 3. Write an equation to represent the financial principle. You should include the equation number from the chapters in pdf provided, such as (2.1), that you are using to set up the problem. 4. You can solve the equation by using a WolframAlpha statement. Write that statement within your solution so that I can verify your answer. 5. If you are using Excel, make sure the Excel table is embedded in the Word file. 6. Use explanations to show your logic. 1.1. At Wal-Mart, in the hardware department, a customer buys five gallons of paint and six brushes and pays $97.52 for them, including 6% sales tax. Another person buys eight gallons of paint and five brushes and pays $146.28, including the sales tax. Find the price of a gallon of paint and that of a brush. Suppose the paint sells for $x per gallon and the brushes are $y each. The total for the first customer is 5x + 6y. Adding 6% sales tax, then it becomes 1.06(5x + 6y). The total is $97.52. Thus we get the equation 1.06(5x + 6y) = 97.52 Likewise, the equation for the second customer is 1.06(8x + 5y) = 146.28 To solve the equations, go to WolframAlpha and write the following instruction 1.06*(5*x+6*y)=97.52,1.06*(8*x+5*y)=146.28 The result comes out as x = 16 and y = 2. Thus, paint is $16 per gallon and brushes are $2 each. ♥ 1.2. Tennessee Corporation has invested in the following two projects. The following table provides the cash flows from the two projects under different states of the economy. State of the Economy Probability Project A Project B Good 25% $6000 $5000 Average 30% $4000 $3000 Poor 45% -$1000 -$2000 Find the following: (A) Standard deviation of A, σ(A) (B) Standard deviation of B, σ(B) (C) Correlation coefficient between the two projects, rAB 1.3. South Dakota Corporation has borrowed $1 million from a bank with the understanding that it will pay $70,000 a month, until the loan is paid off. The bank will charge 9% per annum interest on the unpaid balance, calculated monthly. South Dakota will make the payments at the end of each month. Find the following: (A) How long will it take South Dakota to pay off the loan? (B) What is the partial payment for the last month? 1.4. Caroline is planning for her retirement. She has 20 years before she retires. She plans to keep the money in a bank, which will pay interest at the annual rate of 3% and compound it monthly. She plans to deposit $500 in the account at the beginning of every month in the first year. In subsequent years, she will increase the deposits by 3% every year. In second year, for instance, she will deposit $515 per month. How much money is there in the account after 20 years? 1.5. Rhode Island Corporation 8.5% bonds will mature on January 15, 2021. They pay interest semiannually, on January 15 and July 15. On July 16, 2009, these bonds are selling at $915 each. If your required rate of return is 10%, should you buy these bonds? 1.6. Pennsylvania Company bonds have a coupon of 5%, paying interest semiannually. They have a face value of $1,000 and will mature after 7 years. Your income tax rate for interest income is 30%, but only 15% on capital gains. You pay the taxes once a year. How much should you pay for a Pennsylvania bond if your after-tax required rate of return is 9%? 1.7. Oregon Corporation is expected to pay $1.00 dividend after one year, $2.00 after 2 years, $3.00 after 3 years, and then $4.00 a year uniformly after fourth and subsequent years. If the stockholders of Oregon require 12% return on their investment, find the price of the stock now. What is its price after 10 years? 1.8. Oklahoma Corporation stock pays a dividend on every July 15. In 2012, the dividend is $3.00, in 2013 $3.25, in 2014 $3.50, and in 2015 and all the subsequent years it will be $4.00. The shareholders of Oklahoma require a return of 15% on their investment. Find the price of this stock on July 16, 2012, just after it has paid its dividend. What is its price on July 14, 2014, just before it pays its dividend? 1. Analytical Tools 1 1. Finance and Analytical Tools Objectives: After reading this chapter, you will be able to 1. Get an overview of finance and basic algebra. 2. Use geometric series in financial calculations. 3. Understand the basic concepts of statistics. 4. Use Excel, Maple, or WolframAlpha to solve mathematical problems. 1.1 Field of Finance When you look at the balance sheet of a company, you will see the assets and liabilities are categorized as long-term, or short-term. In this course, we are dealing with the management of long-term assets (machinery, equipment, buildings, land, etc.) and long- term liabilities (bonds) and other long-term financing (stocks, preferred stock). Another course, FIN 361, Working Capital Management, deals with the management of current assets (cash, marketable securities, accounts receivable, and inventories) and current liabilities (accounts payable, short-term financing, and accruals). The following diagram outlines the relationship between the short-term and the long-term assets and liabilities. Assets Liabilities and Equity FIN 361 Current Assets Cash Marketable Securities Accounts Receivable Inventories Current Liabilities Accounts Payable Accruals Notes Payable Short term FIN 508 Long-term Assets Plant and Equipment Less Accumulated Depreciation = Net Plant and Equipment Long-term Liabilities Long-term bonds Owners' Equity Common Stock Preferred Stock Retained Earnings Long term Total Assets are equal to Total Liabilities and Equity The above diagram represents the balance sheet of a company. It is the snapshot of the financial condition of a corporation on a certain date. The last line in the above table shows a very important concept in finance, Total Assets are equal to Total Liabilities and Equity http://www.wolframalpha.com/ http://en.wikipedia.org/wiki/Balance_sheet http://en.wikipedia.org/wiki/Bond_(finance) http://en.wikipedia.org/wiki/Stock http://en.wikipedia.org/wiki/Preferred_stock http://134.198.33.115/hussain/fin361syl.htm http://en.wikipedia.org/wiki/Marketable_securities http://en.wikipedia.org/wiki/Accounts_receivable http://en.wikipedia.org/wiki/Inventory http://en.wikipedia.org/wiki/Accounts_payable http://en.wikipedia.org/wiki/Accruals Analytical Techniques 1. Finance and Analytical Tools _____________________________________________________________________________ 2 In symbols, one can write it as V = B + S (1.1) In this equation, V = total market value of the company B = total market value of the liabilities of the company. This includes bonds and short- term notes. S = total market value of the stock of the company. This includes common and preferred stock. We will discuss this equation in more detail in chapter 9. First, one should learn the basic financial principles, such as time value of money, risk, options, cash flows, and the measurable quantities such as the stock price, earnings per share, debt ratio, etc. FIN 508, explains these basic ideas, and their application to long- term financial management of a company. You may say, “If I were a CEO, I would monitor spending daily.” You will be focusing on the tan part of the diagram, which is a valid activity. You will monitor cash, accounts receivables, inventory, and the daily cash flows. However, you have to know the whole picture. The most important decisions are made in the blue part of the diagram. Here you are raising and investing millions, perhaps billions, of dollars. The recent IPO of Facebook (May 18, 2012) is a good example of this activity. If you make an error, it may turn out to be a big mistake. When you are making a financial decision at a company, you cannot rely entirely on gut feeling, just because you know your business. You have to do some homework first and find the right course of action. If you are presenting your case to a board of directors, or in a court of law, you have to convince the audience with facts. We are learning to do that here in this course. The relationship between different finance courses is as follows. → FIN 582 Advanced Financial Management → FIN 583 Investment Analysis MBA 503C → FIN 508 → FIN 584 International Finance → FIN 585 Derivative Securities → FIN 586 Portfolio Theory 1.2 Problem Solving One can learn finance efficiently by learning to solve financial problems analytically. This