Question

1. Sand Sweet Corp. issued 20 year bonds three years ago (maturity 2036) with a 7% coupon, with interest paid semi-annually. Market and company circumstances have changed so that the current risk factor on the bonds has dropped to 6%. What is the current market price of the bonds? (THINK ABOUT THE CORRECT NUMBER OF INTEREST PAYMENTS; SHOULD PRICE BE MORE OR LESS THAN 1000?)

2. Chapter LTD has bonds on the market with fifteen years remaining until maturity which are currently selling for $920. The bond pay interest annually; and at the current price the bonds are expected to yield 7% to new purchasers. What is the coupon rate negotiated when the bonds were first issued? (SOLVE FOR PMT, CONVERT TO COUPON)

3. Rev Inc. expects to pay a $ 1.50 per share cash dividend NEXT YEAR; and projects a growth rate on future dividends of 4%. If investors require a 7% return on their investment; what is the stock’s current market price? (DGM formula—solve for P)

4. The 8.5 percent ANNUAL coupon bonds of Eberly, Inc., WITH INTEREST PAID SEMI-ANNUALLY are currently selling for $1130.12. The bonds have a face value of $1,000 and mature in 12 years. What is the yield to maturity required by purchasers of the bond today?

5. A Biosystems, Inc. bond has a 9% coupon rate and $ 1,000 face (par) value. Interest is paid semi-annually; and bond will mature in 16 years. Current market conditions are such that bonds of similar risk must generate a 12% return. What should be the bond’s current market selling price?

6. Hit “Em” Straight, Inc. projects that its annual dividends will grow at the rate of 5.1% annually indefinitely. If it has a Dividend yield of 3.4%, what is the required rate of return on the company’s common stock?

Answer 1

1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =17x2

Bond Price =∑ [(7*1000/200)/(1 + 6/200)^k]     +   1000/(1 + 6/200)^17x2

k=1

Bond Price = 1105.66

2

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =7

920 =∑ [(Coupon rate*1000/100)/(1 + 15/100)^k]     +   1000/(1 + 15/100)^7

k=1

Coupon rate% = 13.08

Please ask remaining parts separately, questions are unrelated. I have done one bonus