# 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       0.040 0.00160   0.112 0.01865   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.