1 Problem of payment .(File: Exercise 3)1 Problem about Dividend Discount Model.(File: Exercise 4)1 Problem about CAPM.(File: Exercise 4)

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Financial Markets & Institutions

Mortgages Homework Exercise

Homework Exercise 3

Bob & Kate are purchasing a new home. The house they’ve selected has a price of $350,000.

The mortgage interest rate is currently 5% (regardless of the option they pick below).

They are considering several options:

• For maturity, they are considering both 15 year and 30 year amortizations.

• For down payments they are considering either 10% or 20%.

1. Calculate the amount of their monthly mortgage payment under each of the

alternatives.

Downpayment

Amortization Period

(years)

10%

20%

15

30

2.

Calculate the Total interest payments under each of the 4 alternatives:

Downpayment

Amortization Period

(years)

10%

20%

15

30

3. Assume that Bob & Kate purchase the house putting 20% down and selecting the 15

year amortization period. Construct a Mortgage Amortization Table reflecting the

first 3 months of payments

Month

1

2

3

Beginning

Principal

Balance

Payment

Interest on

Principal

Beginning Balance Repayment

Principal

Balance at

End of

Period

Financial Markets & Institutions

Equity Pricing Homework Exercise

Homework Exercise 4

The stock of company XYZ is currently price at $80 per share. Its earnings this year

(T=0) are $4.00 per share. It has paid out a dividend equal to 40% of its earnings for the

past several years. It’s Return on Equity (ROE) has been 15%.

1.

What is the company’s current Dividend Yield?

Dividend Discount Model

The market expects that companies similar to XYZ will display a rate of return of 13%

per year

2.

What is the company’s expected Growth Rate for Earnings & Dividends?

3. What dividends will the company pay this year (D0) and be expected to pay next year

(D1)?

4. What is the estimated value of the stock today (T=0) using the Dividend Discount

Model?

5. What is the estimated value of the stock 1 year from today (T=1)?

Capital Asset Pricing Model (CAPM)

The current risk free interest rate is 2%

The market as a whole is expected to realize a return of 12% this year

XYZ’s stock has historically displayed a Beta of 0.9

6. Using the CAPM, what is the required rate of return that investors would demand of

XYZ this year?

7. If the required rate of return as calculated in (6) were used in the dividend discount

model, what would be an appropriate value for XYZ’s stock today (T=0)?

Market Multiples

8. If the forward Price / Earnings ratio for XYZ during similar stages of the business

cycle had ranged from 11x to 18x, what would be the range of values for its stock?

…

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