# Week 2 Text Problems

Individual Assignment: Text Problem Sets
February 17 2010,
Ch. 5: Problems
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?
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1,000 x3.7 % =37 # of periods =10years 2 =20 periods the price= 481.29+ 414.64 =\$895.94
10 x 2 r= 9% /2PV
=BMT= 7.4 % x 1.000/2 = 37
FV =1,000
PV = \$895.94
Expected dividend in next year (D1) = \$5.60
Dividend expected growth rate (g) = 6% per year
Required Return on Stock ( R) = 10%
Current Market Value of a Share (P0) = D1 / (R – g)
Current Market Value of a Share (P0) = \$5.60 / (0.10 – 0.06)
Current Market Value of a Share (P0) = \$5.60 / 0.04
Current Market Value of a Share (P0) = \$140
A12. (Required return for a preferred stock) James River \$3.38 preferred is selling for \$45.25. The preferred dividends is now growing. What is the required return on James River preferred stock?
Required Return = Dividend/Market Price
Dividend = \$3.38
Market Price = \$45.25
Required Return = \$3.38 / \$45.25
Required Return = 7.47%
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 quarterly). What is the stock worth?
Perpetual Quarterly Preferred Dividend (D) = \$1.00
Annual Dividend (\$1.00 x 4.00) = \$4.00
Annual Percentage Rate (APR) = 12%
Preferred Stock Value (P0) = (D / R)
Preferred Stock Value (P0) = (\$4.00 / 0.12)
Preferred Stock Value (P0) = \$33.33
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.
If the yield to maturity for all...