# Problems A1, A10, A12, A14, B16, 18,20, C1

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Problem A1: Bond Valuation A \$1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond's coupon rate is 7.4%. What is the fair value of this bond? p. 115. Problem A10: Dividend Discount Model Assume RHM is expected to pay a total cash dividend of \$5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%? p. 126. Problem A12: Required Return For A Preferred Stock James River \$3.38 preferred is selling for \$45.25. The preferred dividend is nongrowing. What is the required return on James River preferred stock? p. 127. Problem A14: Stock valuation Suppose Toyota has nonmaturing (perpetual) preferred stock outstanding that pays a \$1.00 quarterly dividend and has a required return of 12% APR (3% per quarter). What is the stock worth? p. 128. Problem B16: Interest-rate risk Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose Phil El’s bonds have identical coupon rates of 9.125% but that one issue matures in 1 year, one in 7 years, and the third in 15 years. Assume that a coupon payment was made yesterday. p. 116 b. Suppose that the yield to maturity for all of these bonds changed instantaneously to 7%. What is the fair price of each bond now? p.116. c. Suppose that the yield to maturity for all of these bonds changed instantaneously again, this time to 9%. Now what is the fair price of each bond? p.116. d. Based on the fair prices at the various yields to maturity, is interest-rate risk the same, higher, or lower for longer- versus shorter-maturity bonds? Problem B18: Default Risk You buy a very risky bond that promises a 9.5% coupon and return of the \$1,000 principal in 10 years. You pay only \$500 for the bond. Problem B20: Constant Growth Model Medtrans is a profitable firm that is not paying a dividend on its common stock. James Weber, an analyst for A. G. Edwards, believes that Medtrans will begin paying a \$1.00 per share dividend in two years and that the dividend will increase 6% annually thereafter. Bret Kimes, one of James’ colleagues at the same firm, is less optimistic. Bret thinks that Medtrans will begin paying a dividend in four years, that the dividend will be \$1.00, and that it will grow at 4% annually. James and Bret agree that the required return for Medtrans is 13%. p.125,126,128. Problem C1: Bond Valuation Between Coupon Payments Gehr’s Gears, Inc., has bonds outstanding that mature in 14 years and 3 months from today. The bonds have an annual coupon rate of 15% and pay interest every six months. The bonds are currently selling for \$1,100. a. Assuming a coupon payment was made yesterday and there are 29 more coupon payments remaining to be paid in the life of the bond, what is the YTM on this bond? What is the APY for this bond under these assumptions? b. Assuming a coupon payment was made yesterday and there are 28 more coupon payments remaining to be paid in the life of the bond, what is the YTM on this bond? What is the APY for this bond under these assumptions? c. See the end-of-chapter minicase about partial coupon periods. Assuming a coupon payment was made, as it actually was, three months ago and there are 29 more coupon payments remaining to be paid in the life of the bond, what is the YTM on this bond? What is the APY for this bond under these assumptions?

• 11 years ago