7/24/2019 Financial Assign 4

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Assignment #4

Reference: Bond/Stock Valuation, Risk & Return

1. Bond Pricing: Assume a bond has a par value of 1,!!! and promises to pa" a fi#edannual interest rate $%oupon of '( $to be paid semi)annuall" . $a *f bonds of similar risk offer an annual rate of +( $i.e. market rate or "ield +( , ho- much should "ou pa"for this bond Assume the bond has a life of ! "ears. $b 0hat -ill be "our and (return if "ou sell the bond after one "ear $ int: %ompute the 2rice at time 1 -ith thesame information, e#cept 3 1+ $c 4iscuss ho- the market ad5usts for increase in

perceived risk of a bond.

2. Stock Pricing: 6iven the follo-in7 information for 68: 4ividend 1. 9 centsR 1;.ero 7ro-th of dividends$ii %onstant 7ro-th of dividends. $b %ompare "our estimates to current stock priceof 68 and discuss the reasons for discrepanc". $c 4iscuss -h" it is relativel" harderto value stocks compared to bonds.

3. Hostile Bids and Stock Prices

%omcast put in a bid for 4isne" on ?ebruar" 11, !!9. @his offer -as then -ithdra-nafter a fe- months. %omcast s offer for 4isne" shareholders involved offerin7 !. 'share of a %omcast class A share for each 4isne" share,

$a At the time the offer -as placed, 4isne" -as tradin7 for 9.!'. 0hat -as the premium $in ( bein7 offered to shareholders of 4isne" $%omcast share -astradin7 at ;;.+; at the time of the offer .

$b *f "ou -ere holdin7 shares in 0alt 4isne", -ould "ou think that 4isne" made theri7ht choice in not acceptin7 the offer Custif" "our ans-er usin7 most recent

prices of %omcast and 0alt 4isne"

4. Risk and Return

Holding Period Return: Dou bou7ht 1!! shares for < each and sold it a "ear later for;+. @he compan" also paid a dividend of < cents per share durin7 that period. Assume

transaction costs of ' incurred in bu"in7 and sellin7 the shares $a 0hat is "ourhistorical return in $a and $b ( $b *s this a 7ood return Assume ta# on dividends of

;!( and capital 7ain of !(.

Expected Return Assume "ou bu" a lotter" ticket, -hich has the odds of one -inner forever" 1,!!! tickets sold @he ticket costs 1! and if "ou -in, "ou receive ,'!!. 0hat isthe e#pected return from bu"in7 this lotter" ticket *f the State sells 1!,!!! of thesetickets, -hat -ill be their profit $before an" e#penses $ int: Slides '+)+ , slide E +

. Risk !anagement @ake an e#ample to illustrate the < ke" steps of risk mana7ement