Week 4 Problem Set
Answer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_4_Problem_Set.docx, where flastname is your first initial and your last name, and submit it to the appropriate dropbox.
Bonds-1. Interest on a certain issue of bonds is paid annually with a coupon rate of 8%. The bonds have a par value of $1,000. The yield to maturity is 9%. What is the current market piece of these bonds? The bonds will mature in 5 years.
PV=(9%, 5, 80, 1000)
Bonds-2. A certain bond has 12 years left to maturity. Interest is paid annually at a coupon rate of 10%. The bonds are currently selling for $850. What is their YTM?
YTM=12.16% SEE EXCEL
Bonds-3. A certain bond pays a semiannual coupon rate at a 10% annual rate. The bond has a par ...view middle of the document...
80 SEE EXCEL
Bond-6. A given bond has five years left to maturity. Interest is paid annually and the annual coupon rate is 9%. The par value of the bond is $1,000. The bond currently sells for $1,000. What is the yield to maturity?
YTM=10.35% SEE EXCEL
Chapter 9 (pages 303–203):
Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in 1 year, and its equity cost of capital is 15%. What price must you expect it to sell for right after paying the dividend in 1 year in order to justify its current price?
50 = (2+x)/(1+.15)
NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year?
SEE EXCEL Price per share = 13.33
Summit Systems will pay a dividend of $1.50 this year. If you expect Summit’s dividend to grow by 6% per year, what is its price per share if its equity cost of capital is 11%?
P=1.50/(11%-6%)= $30---SEE EXCEL
Dorpac Corporation has a dividend yield of 1.5%. Dorpac’s equity cost of capital is 8%, and its dividends are expected to grow at a constant rate. SEE EXCEL
a. What is the expected growth rate of Dorpac’s dividends? Dividend minus Capital gives the growth. 8-1.5 = 6.5%
b. What is the expected growth rate of Dorpac’s share price?
The Share price will have a growth rate of 6.5% since the dividend has a constant growth rate
Procter & Gamble will pay an annual dividend of $0.65 1 year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. According to the dividend-discount model, what is the value of a share of Procter & Gamble stock if the firm’s equity cost of capital is 8%? SEE EXCEL
Pv1-5 = .65/(.08-.012)*(1-(1.12/1.08)^5)=$3.24
Value on date 5 of the rest of the dividend payments:
PV5 = .65(1.12)^41.02/.08-.02= 17.39
Discounting this value to the present gives
PV0= 17.39/(1.08)^5 = $11.83
So the value of Procter and Gamble is P= PV1-5+ pV0 = 3.24 + 11.83= $15.07