Corporate Finance Homework 3

Chapter 5 Problems (pp. 232-233)

(5-1). Bond Valuation with Annual Payments

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  • Jackson      Corporation’s bonds have 12 years remaining to maturity. Interest is paid      annually, the bonds have a $1,000 par value, and the coupon interest rate      is 8%. The bonds have a yield to maturity of 9%. What is the current      market price of these bonds?

(5-2). Yield to Maturity for Annual Payments

  • Wilson      Corporation’s bonds have 12 years remaining to maturity. Interest is paid      annually, the bonds have a $1,000 par value, and the coupon interest rate      is 10%. The bonds sell at a price of $850. What is their yield to      maturity?

(5-6). Maturity Risk Premium

· The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.3%. What is the maturity risk premium for the 2-year security?

(5-7). Bond Valuation with Semiannual Payments

· Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds?

(5-13). Yield to Maturity and Current Yield

· You just purchased a bond that matures in 5 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bond’s yield to maturity?

Chapter 7 Problems (p. 334)

7-2). Constant Growth Valuation

· Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1=$1.50D1=$1.50). The dividend is expected to grow at a constant rate of 6% a year. The required rate of return on the stock, rsrs, is 13%. What is the estimated value per share of Boehm’s stock?

(7-4). Preferred Stock Valuation

· Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock’s required rate of return (assume the market is in equilibrium with the required return equal to the expected return)?

(7-5). Nonconstant Growth Valuation

· A company currently pays a dividend of $2 per share (D0=$2)(D0=$2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, and then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?