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# Financial Essay

737 words - 3 pages

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.
SEE EXCEL
PV=(9%, 5, 80, 1000)
PV= \$961.10

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?
=100+((1000-850)/12)/(1000+850)/2
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):
1.
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)
X=55.50
SEE EXCEL
5.
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
6.
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

7.
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

12.
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

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