Show all work. Label and clearly explain your answer. This is very important.
1) see attached photo
a) Draw a diagram showing the cash flows for each of the bonds.
b) Calculate the price of the Vermeero bond.
c) Calculate the yield to maturity for the Renwaro bond.
d) Suppose you purchase the Renwaro bond today. You plan to sell this bond one year from now, and you forecast that the yield to maturity of the Renwaro (at the sale date) will be5% annual rate, compounded semiannually. If your forecast is correct, what will the holding period yield for this investment be?
2) See attached photo
The PLAY Index is a price-weighted stock index based on the 5 largest toy and game manufacturers in the nation. The following chart shows the prices and shares outstanding for each of the five companies at year-end for 2016and 2017. The initial divisor for the index is 100.
a) Calculate the rate of return on the PLAY index over 2017.
b) At the end of 2017, Linkna Logs was dropped from the index, and was replaced by Loggle Corporation. Loggle’s share price was $166at the time. Calculate the new divisor for the index.
c) Suppose the PLAY index was a value-weighted index instead of a price-weighted index. If so, what would be the rate of return over 2017?
3) Morocco Manufacturing does not currently pay a cash dividend, but it does pay a stock dividend of 3% per year. A stock dividend does not directly pay cash to the shareholders. Instead, it is a payment in the form of additional shares of stock. For example, if you own 100 shares, a 3% stock dividend will mean that you will receive 3 new shares, giving you a total of 103 shares.
Morocco will not pay a cash dividend, and will maintain the 3% per year stock dividend for 10 years. Morocco will then discontinue the stock dividend and institute a cash dividend of $5 per share, starting in year 11. In subsequent years the cash dividend will increase at a constant growth rate of 6% per year.
The appropriate interest rate is 14% per year. Calculate the current intrinsic or fundamental value of a share of Morocco Manufacturing stock.
4)Lava Development Company has maintained stable earnings of $7 per share, and has also maintained a 100% payout policy. Recently, Lava has decided to start a new line of business to develop luxury housing with scenic views of active volcanoes. The new line will require Lava to change to a policy of retaining 30% of its earnings for the foreseeable future. You estimate that with the new line of business that dividends will grow by 2% per year in perpetuity (after next year). Lava’s current cost of capital is 12%.
a. Calculate the intrinsic value of Lava Development shares?
b. Calculate Lava’s net present value of growth opportunities?