Financial Management Worksheet

1. Your stockbroker has called to tell you about two stocks: Netflix, Inc. (NFLX) andAmazon.com, Inc. (AMZN). She tells you that NFLX is selling for $340.00 per share and
that she expects the price in one year to be $395.00. AMZN is selling for $1,861.00 per
share and she expects the price in one year to be $2,171.00. The expected return on
NFLX has a standard deviation of 12 percent, while the expected return on AMZN has a
standard deviation of 35 percent. The market risk premium for the S & P 500 has
averaged 6.5 percent. The beta for NFLX is 1.29 and the beta for AMZN is 1.51. The 10year Treasury bond rate is currently 1.90%. Neither NFLX nor AMZN pays a cash
dividend.
Required:
a) Determine the probability for each stock that you would earn a negative return.
b) Determine the probability for each stock that you would earn more than your required
rate of return.
c) Explain why you would or would not buy either or both of the two stocks.
2. BAM Corp. preferred stock is selling for $115 per share in the market. This preferred
stock has a par value of $100 and a dividend rate of 14 percent.
Required:
a) What is the current yield on the stock?
b) If an investor has a required rate of return of 11 percent, what is the value of the stock
for that investor?
c) Should the investor acquire the stock? Explain.
d) Explain why preferred stock is referred to as a hybrid security.
3. On February 1, 2000, Herro Corp. sold an $800 million bond issue to finance the
purchase of a new distribution facility. These bonds were issued in $1,000
denominations with a maturity date of February 1, 2030. The bonds have a coupon rate of
10.00% with interest paid semiannually.
Required:
a) Determine the value today, February 1, 2020 of one of these bonds to an investor who
requires an 8 percent return on these bonds. Why is the value today different from the par
value?
b) Assume that the bonds are selling for $1,175.00. Determine the current yield and the
yield-to-maturity. Explain what these terms mean.
c) Explain what layers or textures of risk play a role in the determination of the required
rate of return on Herro’s bonds.
4. Suppose that Facebook, Inc. (FB) is selling for $220.00. Analysts believe that the growth
rate for FB will be 15% per year for the next three years, 10% per year for the following
two years, and thereafter the growth rate will be 8% indefinitely. FB’s most recent cash
dividend per share was $5.00. The dividend will grow by the same rate as the company.
Stockholders require a return of 10 percent on FB’s common stock.
Required:
a) Based on the above assumptions, determine the price of FB’s common stock
b) Explain whether an investor should buy the stock
5. In the context of our class discussion, explain the significance of market value added
(MVA), economic value added (EVA), and free cash flow. No computations are
necessary.