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Financial Management I

FinancialManagement I

PartA: Moore Company

Giventhat

Couponrate = 8%

Parvalue = $1,000

Yieldto maturity for the bond = 10%

Question(a): The value of the bond if it matures at

Five years

Ten years

Fifteen years

Twenty years

Years to maturity

5

10

15

20

Annual Coupon Rate

4.0%

4.0%

4.0%

4.0%

Coupon PMT

40

40

40

40

Par value

1000

1000

1000

1000

YTM

5.00%

5.00%

5.00%

5.00%

Price

($922.78)

($875.38)

($846.28)

($828.41)

Fiveyears to maturity

Priceof the bond if it matures at 5 is $922.78

Tenyears to maturity

Priceof the bond if it matures at 10 is $875.38

Fifteenyears to maturity

Priceof the bond if it matures at 15 is $846.28

Twentyyears to maturity

Priceof the bond if it matures at 20 is $828.28

Question(b)

Thelonger the maturity of the bond selling at a discount, the lower theprice of the bond (Brigham,&amp Houston, 2012).There is always an inverse relationship that exists between the priceand maturity of the bond that are selling at discount as the abovecalculations shows.

Asthe bond moves towards its maturity, its market price is basicallygetting close to its par value which means that the bonds that has alonger maturity often fluctuates with the changes in market rate(Moyer,McGuigan, Rao, &amp Kretlow, 2011).

PartB: Crescent Corporation

Giventhat

Dividends= $2 per share

Continue= 4 Years

Requiredrate of return = 13%

Holdingperiod = 4 Years

Priceafter four years = $30

Presentvalue =?

Presentvalue = (13%*4*2*30)

Presentvalue = $34.35

N

4

I/YR

13.00%

PMT

2

FV

30

PV

(24.35)

PartC: Use of information in the provided table

Given that

State of Economy

Probability

Return on A

Return on B

Return on C

Boom

0.35

0.040

0.210

0.300

Normal

0.50

0.040

0.080

0.200

Recession

0.15

0.040

-0.010

-0.260

Question(a): Calculation of the expected rate of return of each asset

Particulars

Probability

Return on A State

Product

Boom

0.35

0.04

0.014

Normal

0.5

0.04

0.02

Recession

0.15

0.04

0.006

Expected rate of return

0.04

Expected rate of return of asset A

0.04 or 4%

Particulars

Probability

Return on B State

Product

Boom

0.35

0.21

0.0735

Normal

0.5

0.08

0.04

Recession

0.15

-0.01

-0.0015

Expected rate of return

0.112

Expected rate of return of asset B

0.112 or 11.2%

Particulars

Probability

Return on C State

Product

Boom

0.35

0.3

0.1050

Normal

0.5

0.2

0.1000

Recession

0.15

-0.26

-0.0390

Expected rate of return

0.166

Expected rate of return of asset C

0.166 or 16.6%

Question(b): Calculation of the variance of each asset

State of Economy

Pi

Return on A

Xp(A)

Xp^2

Return on B

Xp(B)

Xp^2

Return on C

Xp(C)

Xp^2

Boom

0.35

0.040

0.014

0.00056

0.210

0.0735

0.015435

0.300

0.105

0.0315

Normal

0.50

0.040

0.020

0.00080

0.080

0.04

0.0032

0.200

0.100

0.0200

Recession

0.15

0.040

0.006

0.00024

-0.010

-0.0015

0.000015

-0.260

-0.039

0.01014

&nbsp

&nbsp

&nbsp

0.040

0.00160

&nbsp

0.112

0.01865

&nbsp

0.166

0.06164

Varianceof A

Varianceof A = 0.00160-(0.04*0.04)

Varianceof A = 0

Varianceof B

Varianceof B = 0.01865-(0.112*0.112)

Varianceof B = 0.000234

Varianceof C

Varianceof C = 0.06164-(0.166*0.166)

Varianceof C = 0.034084

Question(c): Calculation of the Standard Deviation of each asset

Standarddeviation is given by the square root of variance

StandardDeviation of A

StandardDeviation of A = √0

StandardDeviation of A = 0

StandardDeviation of B

StandardDeviation of B = √0.000234

StandardDeviation of B = 0.015295

StandardDeviation of C

StandardDeviation of C = √0.034084

StandardDeviation of C = 0.184619

References

Brigham,E. F., &amp Houston, J. F. (2012).&nbspFundamentalsof financial management.Cengage

Learning.

Moyer,R. C., McGuigan, J. R., Rao, R. P., &amp Kretlow, W. J.(2011).&nbspContemporaryfinancial

management.Nelson Education.