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Finance Week2

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Finance Week2

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?
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%?
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?
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?
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?
B16. (Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock
Exchange. Suppose PhilEl’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.
a. If the yield to maturity for all three bonds is 8%, what is the fair price of each bond?
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?
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?
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?

B18. (Default risk) You buy a...
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