Corporate Finance
Problem Set 4
Assume a par value of $1000 on all bonds and annual interest payments unless otherwise stated.
5-1 Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, bonds have $1000 par value, and the coupon interest rate is 8%. The bonds the BU maturities of 9%. What is the current market price for these bonds?
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5-2 Wilson Wonders’ bonds have 12 years remaining to maturity. Interest is paid annually; the bonds have a $1000 par value and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity (YTM)?
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5-3 Heath Food’s bonds have 7 years remaining to maturity. The bonds the face value $1000 and yield to maturity of 8%. The pay interest annually and have a 9% coupon rate. What is their current yield?
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5-7 Renfro Rentals has issued bonds that have a 10% coupon rate, payable semi-annually. The bonds mature in 8 years have a face value of $1000 and a yield to maturity of 8.5%. What is the current price of the bonds?
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5-8 Thatcher Corporation’s bonds will mature in 10 years. The bonds have a face value of $1000 and an 8% coupon rate, paid semiannually. The current price of bonds is $1100 the bonds are callable in five years at a call price of $1050.
a. What is their yield to maturity (YTM)?
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b. What is their yield to call (YTC)?
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7-1 Thress Industries just paid a dividend of $1.50 a share. (i.e D_{0} = 1.50). The dividend is expected to grow 5% per year for the next three years and then 10% a year thereafter. What is the expected dividend per share for each of the next 5 years?
7-2 Boehm Inc. is expected to pay a $1.50 per share dividend at the end of this year (i.e. D_{1} = $1.50). The dividend is expected to grow at a constant rate of 7 percent the year. The required rate of return on the stock, r_{s}, is 15%. What is the current value per share of the stock?
7-3Woidtke Manufacturing’s stock currently sells for $20.00 a share. The stock just paid a dividend of $1.00 a share (i.e. D_{0} = $1.00) and the dividend is expected to grow forever at a constant rate of 10% a year.
a. What stock price is expected one year from now?
b. What is the required rate return on the stock?
7-4 Nick’s Enchiladas Inc. has preferred stock outstanding that pays a dividend of $5.00 at the end of each year. Preferred stock sells for $50.00 a share. What is the stock’s required rate return?
7-11Assume that the average firm in your company’s industry is expected to grow at a constant rate of 6% and its dividend yield is 7%. Your company is about as risky as the average firm in the industry, but has just successfully completed some R&D work that leads you to expect that its earnings and dividends will grow at a rate of 50% [D_{1} = D_{0} (1+g) =D_{0} x (1.50)) this year and 25% the following year, after which growth should return to the 6% industry average. If the last dividend paid (D_{0}) was $1.00, what is the value per share of your firm’s stock?
7-12Simkins Corp. is expanding rapidly, and it does not pay any dividends because they currently needs to retain all its earnings. However, investors expect the company to begin paying dividends, that the first dividend of $1.00 per share coming 3 years from today. The dividend should grow rapidly – at a rate of 50% per year – during years 4 and 5. After year 5, the company should grow at a constant rate of 8% per year. If the required return on the stock is 15%, what is the value of the stock today?
7-13Several years ago, Rolen Riders issued preferred stock with a stated annual dividend of 10%. Par value of the stock is $100. Preferred stock of this type currently yields 8%. Assume dividends are paid annually.
a. What is the value of Rolen’s preferred stock?
b. Suppose interest rate levels have risen to the point where the preferred stock now yields 12%. What would be the new value Rolen’s preferred stock?
7-14You buy a share of The Ludwig Corp. stock for $21.40. You expect it to pay dividends of $1.07, $1.1449, and $1.2250 in Years 1, 2 and 3, respectively, and you expect to sell it at a price of $26.22 at the end of 3 years.
a. Calculate the growth rate in dividends
b. Calculate the expected dividend yield
c. Assuming that the calculated growth rate is expected to continue, you can add the dividend yield to the expected growth rate to obtain the expected total rate of return. What is the stock’s expected total rate of return?