Question

Heginbotham Corp. issued 10-year bonds two years ago at a coupon rate of 9 percent. The bonds make semiannual payments. If these bonds currently sell for 102 percent of par value, what is the YTM? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.

YMT _____%

Grohl Co. issued 8-year bonds a year ago at a coupon rate of 11 percent. The bonds make semiannual payments. If the YTM on these bonds is 7 percent, what is the current bond price?

$1,142.48

$1,228.41

$1,218.41

$1,386.22

$718.96

Far Side Corporation is expected to pay the following dividends over the next four years: $14, $12, $9, and $4. Afterward, the company pledges to maintain a constant 3 percent growth rate in dividends forever.

  

Required:

If the required return on the stock is 12 percent, what is the current share price? (Do not round your intermediate calculations.)

$61.91

$60.11

$57.10

$58.06

$66.99

Answer 1

1)

Assuming face value to be $1000

Coupon = (0.09 * 1000) / 2 = 45

Number of periods = 8 * 2 = 16

Price = 102% of 1000 = 1020

YTM = 8.65%

Keys to use in a financial calculator:

2nd I/Y 2

FV 1000

PV -1020

PMT 45

N 16

CPT I/Y

2)

Assuming face value to be $1000

Coupon = (0.11 * 1000) / 2 = 55

Number of periods = 7 * 2 = 14

Rate = 7% / 2 = 3.5%

Current bond price = Coupon * [1 - 1 / (1 + r)ⁿ] / r + FV / (1 + r)ⁿ

Current bond price = 55 * [1 - 1 / (1 + 0.035)¹⁴] / 0.035 + 1000 / (1 + 0.035)¹⁴

Current bond price = 55 * [1 - 0.617782] / 0.035 + 617.78179

Current bond price = 55 * 10.920514 + 617.78179

Current bond price = $1,218.41

You can also find this using a financial calculator:

2nd P/Y 2

FV 1000

PMT 55

N 14

I/Y 7

CPT PV

3)

Year 5 dividend = 4 (1 + 3%) = 4.12

Value at year 4 = D5 / required rate - growth rate

Value at year 4 = 4.12 / 0.12 - 0.03

Value at year 4 = 4.12 / 0.09

Value at year 4 = 45.7778

Current share price = Present value of dividends

Current share price = 14 / (1 + 0.12)¹ + 12 / (1 + 0.12)² + 9 / (1 + 0.12)³ + 4 / (1 + 0.12)⁴ + 45.7778 / (1 + 0.12)⁴

Current share price = $60.11