FIL 240 Lecture13Outline of Last Lecture I. Level vs. Unlevel Annuitiesa. Level annuityb. Unlevel annuityII. Ordinary Annuity vs. Annuity Duea. Ordinary Annuityb. Annuity Duec. Rule d. CalculationsIII. Preferred Stocka. Cumulativeb. Debt vs. Equity financingIV. Perpetuitya. Ruleb. EquationOutline of Current Lecture I. Constant Growth Perpetuitya. Present Value Equationb. D1 Equationc. Example 1d. Example 2II. Annuitya. Exampleb. RuleIII. Yield on Bondsa. Rule 1b. Rule 2c. Call-able Bondsd. Yield to CallIV. Liquidity & Money Supplya. M0b. M1c. M2d. M3These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Current LectureAnnuities & PerpetuitiesI. Constant Growth Perpetuitya. PV=D1/(K-g)b. D1=D0(1+g)c. Dividend of 0.2/share, expected to grow at constant rate of 10% for foreseeable future. If market discounts cash flows at 12%, what is current price of security?i. D0=0.20ii. D1=0.2(1+.10)=0.22iii. K=0.12iv. g=0.10v. PV=0.22/(0.12-0.10)=$11.00/shared. Dividend of 0.25/share, expected to grow at constant rate of 8% for foreseeable future. Beta is 1.25. If expected return to market portfolio is 9%; short-term t-billsyield 0.005, what is current price of common stock?i. Use capital asset pricing model if there’s beta. ii. CAPM=Ks=Kf + Bs(Km-Kf)iii. Ks=0.005+1.25(0.09-0.005)=0.11125iv. PV=D1/(K-g)v. D1=0.25(1+0.08)=0.27vi. K=0.11125vii. g=0.08viii. PV=0.27/(0.11125-0.08)=$8.64/shareII. Annuitya. Bond – 3.8% 2029i. Discount - 3.6%ii. N=15iii. I%=3.6iv. PMT=38v. FV=1000 – every bond has $1000 at the endb. Assume semi-annual payments on exam – multiply x2III. Yield on Bondsa. 5.5% 2034, currently quoted at 98.65, what is yield to maturity?i. N=40ii. I%=?*2=5.61%iii. PV=-986.5iv. PMT=55/2=27.5v. FV=1000b. The farther a bond is from maturity, the more the price will respond to a deviation between par and maturity.c. Every bond at maturity pays face value or pays $0 (if the company has gone into bankruptcy)d. Call-able Bonds – the company has the right to pay off the bond early, before maturity date. They do this so they don’t have to pay the premium. e. Yield to call – assumes they will call in that year. IV. Liquidity & Money Supplya. M0 – cash & currency – most liquid – base currencyb. M1 = M0 + checking accounts + traveler’s checks + demand depositsc. M2 = M1 + NOW(negotiable order of withdrawal – credit unions) accounts + small time deposits (CDs)d. M3 = M2 + large time deposits + Euro dollars (all money from other countries waiting to be
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