Homework

4. Tracer Manufacturers issued a 10-year bond six years ago. The bond’s maturity value is $1,000, and its 

coupon interest rate is 6 percent. Interest is paid semiannually. The bond matures in four years. If 

investors require a return equal to 5 percent to invest in similar bonds, what is the current market value of 

Tracer’s bond?



5.The free cash flows (in millions) shown below are forecast by Simmons Inc. If the weighted average 

cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 

3 as from Year 2 to Year 3

Year: 0 1 2 3

Free cash flow: -$20 $42 $45

1) What is the value of operations? (Hints: the growth rate of FCF after year 3 is 45/42-1, since the 

growth rate after year 3 is the same as the rate from year 2 to year 3)

2) the balance sheet show $ 20 million of short-term investment that are unrelated to investment, $30 

million of long-term debt, $40 million of preferred stock, and $100 million of common equity. This firm 

has 10 million shares of stock outstanding. What is the best estimate of the stock’s price per share?