# Wk 2 Problems

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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.