664 Words3 Pages

Chapter 5
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?
PV factor calculation:
I is return required (9%) = 0.09 N is the period of maturity = 10 Bond Value is $1000
(Cash flow)PV Factor = 1/(1+I)^N = 0.42241
PV = 1000 * 0.42241 = 422.41
Coupon rate is used to calculate the present value of the bond.
Cash flow = $1000 * 7.4/100 = $74
PV factor = (1/I) * (1-1/(1+I)^N
1/.09=11.111* (1-1/(1.09)^N
11.111*(1-.42241)
11.111*.57759
= 6.4176
PV = $74 * 6.4176 = 474.90
Fair Value of the bond = 474.90 + 422.41 = 897.31
A10.
Dividend discount model Assume RHM is expected to pay a total cash dividend of $5.60 next year and the 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%
Investopedia: Value of stock = Dividend per share / Discount Rate-Dividend growth rate
5.60/10%-6%
=5.60/.04
= 140
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 Rivers preferred stock?
RRR=Dividend/Market Price
=3.38/45.25
= 7.47%
A14.
Stock Valuation. Suppose Toyota has no maturing (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
Perpetual quarterly Dividend = $1.00*4 = 4.00
Annual APR = 12%
4.00/.12
= $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.

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