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...