Question

1.Bonds issued by the Tyler Food chain have a par value of $1,000, are selling for $1,340, and have 20 years remaining to maturity. Annual interest payment is 16.5 percent ($165), paid semiannually.   

Compute the approximate yield to maturity. (Use a Financial calculator to arrive at the answers. Do not round intermediate calculation. Round the final answer to 2 decimal places.)

Approximate yield to maturity

2.Rick’s Department Stores has had the following pattern of earnings per share over the last five years:  

Year	Earnings per share
20XU	$	13.00
20XV		13.65
20XW		14.33
20XX		15.05
20XY		15.80

The earnings per share have grown at a constant rate (on a rounded basis) and will continue to do so in the future. Dividends represent 40 percent of earnings.

  

a. Project earnings and dividends for the next year (20XZ). (Do not round intermediate calculations. Round the final answers to 2 decimal places.)

  

	20XZ
Earnings	$
Dividend	$

  

b. If the required rate of return is 13 percent, what is the anticipated share price at the beginning of 20XZ? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

  

Anticipated stock price           $

3.

Calculate the price of a bond originally issued six years ago that pays semiannual interest at the rate of 12 percent and matures in seven years at $1,300. The market currently requires an 8 percent return for a bond of this risk. (Use a Financial calculator to arrive at the answers. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Price of a bond           $

Answer 1

Q#1:

YTM=11.98% Calculated as follows:

Set END (Default)

N=20*2=40

PV=1340[+/-]

PMT= 165/2=82.5

FV=1000

2^ND P/Y=2, C/Y=2

2^ND QUIT

CPT I/Y = 11.98

Q#2:

Growth rate in EPS (g) = (En/E0)^(1/n)-1

Where En= EPS for nth year (given as $15.80), E0= EPS at the beginning of assessment period (given as $13 and n= Number of periods (4 years).

Plugging the inputs,

Growth rate in EPS= (15.80/13)^(1/4)-1 = 5%

(a ): Projected earnings for 20XZ = Earnings for 20XY*(1+g)

=15.8*1.05 = $16.59

Given, Dividend payout= 40% of earnings

Therefore, Dividend for 20XZ = 16.59*40% = $6.64

(b): Anticipated stock price at the beginning of 20XZ= Dividend for 20XY/(r-g)

Where r= required rate of return (given as 13%) and g= constant growth rate (5% as above)

Plugging the inputs,

Anticipated stock price at the beginning of 20XZ= 6.64/(0.13-0.05)= $83.00

Q#3:

Current price of the bond= $1,349.04 calculated as below:

Set END (Default)

N=1*2=2

I/Y= 8

PMT= 1300*12%/2=78

FV=1300

2^ND P/Y=2, C/Y=2

2^ND QUIT

CPT PV= -1349.04