# sf004 sources and uses of long term capital 6

Please check attached highlighted items by yellow only to be solved. Attached are the question and below are helpful comments:

Learning Objective 1.2: Solve TVM problems based on experience in an industry.: Additional Comments: Review text readings and examples carefully. Use the correct formula for PV & FV of annuity. Here is a YouTube video:https://www.youtube.com/watch?v=Vs3loeKFbAo

Learning Objective 2.1: Calculates the prices of two bonds at 0, 1, 2, 3, and 4 years to maturity.: Additional Comments: Calculations of values of Bond C at each year from 0 to 4 years to maturity are incorrect. Here is a YouTube video: https://www.youtube.com/watch?v=tJLR3se4Pa4&t=17s

Learning Objective 2.2: Analyze the prices for two bonds at 0, 1, 2, 3, and 4 years to maturity.: Additional Comments: Review text readings. Explain reasons for differences in values at years 1 to 4 to maturity between the 2 bonds. Cite references.

Learning Objective 3.2: Calculate the yield to call of a bond.: Additional Comments: Incorrect. Yield To Call at 5 years means there are (10-5 = 5) years to maturity and face value at end of 5 years is \$1,090. Calculate YTC using values shown for face value and years to maturity with the formula in YouTube video.

Learning Objective 3.3: Determine the expected yield of a bond.: Additional Comments: Review text readings on callable bonds.

Learning Objective 4.1: Calculate the required return rates for two companies for comparison purposes.: Additional Comments: Using CAPM, required rate of return = riskfree rate + [beta (market return – riskfree rate)]

Learning Objective 4.2: Calculate the required return rate for a company.: Additional Comments: Riskfree rate = (real riskfree rate + inflation rate). Use riskfree rate above. Market risk premium is given which is (market return – riskfree rate). Do not deduct riskfree rate from market risk premium. Study text readings carefully.

Learning Objective 5.4: Calculate a company’s intrinsic value today.: Additional Comments: Po = (1.50/1.10) + [(1.80 + 37.80)/(1.10)^2]

Learning Objective 6.1: Calculate a company’s cost of common equity capital.: Additional Comments: D1 = Do(1 + g)

Cost of equity = [(D1/Po)] + g

Learning Objective 6.2: Use a company’s cost of equity capital to compute the company’s WACC.: Additional Comments: Recalculate with correct cost of equity from above.

Learning Objective 6.3: Provide a recommendation based on analysis of a company’s WACC.: Additional Comments: Explain opportunity cost of retained earnings. Review text readings. Increasing debt increases riskiness of firm. Explain why the recommendations are incorrect. Review text readings.