This task assesses the following learning outcomes:
· Develop understanding of the time of value of money and basics in risk-return analysis.
· Understand the bonds and stocks valuation inside business enterprises.
· Improve analytical and quantitative skills.
DEADLINE TO SUBMIT: Sunday 23 May 2021, 23:59 Barcelona time.
Submission file format: Word document with all the answers, clearly identifying each question separately.
ASSIGNMENT QUESTIONS:
IMPORTANT: SHOW YOUR DETAILED SOLUTIONS FOR EACH QUESTION.
QUESTION 1.
A 20-year-old student wants to save €2 a day for her retirement. Every day she places €2 in a drawer. At the end of each year, she invests the accumulated savings (€730) in a brokerage account with an expected annual return of 6%.
a. If she keeps saving in this manner, how much will she have accumulated at age 65? (5 points)
b. If a 40-year-old investor began saving in this manner, how much would he have at age 65? (5 points)
c. How much would the 40-year-old investor have to save each year to accumulate the same amount at 65 as the 20-year-old investor? (5 points)
QUESTION 2.
Megan purchased a €15,000 car two years ago using an 8 percent, four-year loan. The terms required her to amortize the loan with 4 equal end-of-year payments.
She has decided that she would sell the car now, if she could get a price that would pay off the balance of her loan.
a. Calculate the amount of annual payments associated with her car loan (5 points)
b. Fill in the loan amortization schedule: (10 points)
Beginning
Balance
Annual
Payment
Interest Payment
Principle Repayment
Ending Balance
Year 1
Year 2
Year 3
Year 4
c. What is the minimum price Megan would need to receive for her car? (5 points)
QUESTION 3.
You are given the following information about the security:
State of Economy Probability of State of Economy Rate of Return if State Occurs
Boom 0.28 0.175
Normal 0.67 0.128
Recession 0.05 0.026
a. What is the expected return on this security? (5 points)
b. What are the variance and the standard deviation of the returns on this security? (10 points)
QUESTION 4.
The common stock has an expected return of 15.4 percent. The return on the market is 11.2 percent, the inflation rate is 3.1 percent, and the risk-free rate of return is 3.6 percent. What is the beta of this stock? (10 points)
QUESTION 5.
A corporate bond of a €1,000 face value with a 6.5 percent coupon, paid semi-annually, has 15 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.2 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 8.5 percent. What will be the change in the bond’s price in euros and percentage terms? (10 points)
QUESTION 6.
Olalla Inc. outstanding bonds have a €1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semi-annually, and they sell at a price of €975. What is the bond’s nominal coupon interest rate? (10 points)
QUESTION 7.
The next dividend payment by Emma Inc. will be €3.20 per share. The dividends are anticipated to maintain a constant growth rate of 6 percent. If the stock currently sells for €65 per share, what is the required return? (5 points)
QUESTION 8.
John Corporation is expected to pay the following dividends over the next four years: €13, €8, €6.50, and €2.40. Afterwards, the company pledges to maintain a constant 4.5 percent growth rate in dividends. If the required return on the stock is 11 percent, what is the current share price? (15 points)
Rubrics
Descriptor
9-10
The student demonstrates an excellent understanding of the concepts.
8-8.9
The student demonstrates a good understanding of the concepts.
7-7.9
The student demonstrates a fair understanding of the concepts.
6-6.9
The student demonstrates some, but insufficient understanding of the concepts.
3-5.9
The student demonstrates insufficient understanding of the concepts. They may mention some relevant ideas or concepts, although it is clear that the relationship between them is not understood by the student.
1-2.9
The student demonstrates insufficient understanding of the concepts and does not mention any relevant ideas or concepts.
0
The student leaves the question blank or cheats.
Points are stated at the end of each question.

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