Question

i) Consider a semiannual bond with an 8% coupon and with yield to maturity 10%. If the bond’s YTM remains constant, then in one year, will the bond price be higher, lower, of unchanged? Why?

ii) Brothers Corp expects to earn $6 per share next year. The firm’s ROE is 15% and its plowback ratio is 50%. If the firm’s market capitalization rate is 13%, what is the present value of its growth opportunities?

iii) Finance Corporation’s free cash flow is reported as $200 million. The firm’s interest expense is $22 million. Assume the tax rate is 35% and the net debt of the firm increases by $3 million. What is the market value of equity if the free cash flow to equity (FCFE) is projected to grow at 3% indefinitely and the cost of equity is 10%?

Answer 1