A1.)(Bond valuation) A 1,000 face value bond has a remaining of a maturity of 10 years and a required return of 9%. The bonds coupon rate is 7.4%. What is the fair value of this bond?
A10.) (Dividend discount model) Assume RHM is exspected to pay a total cash dividend of $5.60 next year and its dividends are exspected 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%?
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A12.) (Required return for a perfered stock) James River $3.38 perfered is selling for $45.25.The prefered dividend is nongrowing. What is the required return on James River prefered stock?
A14.) (Stock valuation) Suppose Toyota has nonmaturing (perpetual) prefered 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.) (Intrest-rate risk) Philidelphia electric has many bonds trading on the New York Stock Exchange. Suppose Philidelphia electric 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 for each bond?
b.) Suppose that the yield to maturity for all these bonds changed instantaneously to 7%. What is the fair price of each bond now?
c.) Suppose that the yield to maturity for all these bonds changed instantaneously again, this time to 9%. Now what is the fair price to each bond?
d.) Based on the fair prices at the various yields to maturity is intrest rate risk the same, higher, or lower for longer- versus shorter maturity bonds?
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.
a.) You recieve the coupon payments for three years and the bond defaults. After liqudating the firm, the bond holders recieve a distribution of $150 per bond at the end of 3.5 years. What is the realized return on your investment?
b.) The firm does far better than exspected and bond holders recieve all of the promised intrest and prinicpal payments. What is the realized return on your investment?
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 firms, is less optimistic. Bret thinks that Medtran 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 agrees that the required for Medtrans is 13%.
a.) What value would James estimate for this firm?
b.) What value would Bret assign to the Medtrans stock?
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