1. Maryland Computers has an outstanding bond issue with a par value of $1,000 ,

Question

1. Maryland Computers has an outstanding bond issue with a par value of $1,000, with an annual 12% coupon rate. However, note that interest payments on this bond are paid semi-annually. The bond was issued 25 years ago and has 5 years remaining until maturity. What is the market value of this bond today, assuming a 14% annual required rate of return?

  a. First, label the bond variables:

1. Semi-annual coupon payment (PMT):

2. Semi-annual required rate of return:

3. Bond par value:

4.   Semi-annual time periods remaining until maturity:

b. Calculate the current market value of this bond:

2. A firm has an issue of preferred stock outstanding that has a par value of $100 and a 4% dividend. If the current market price of the preferred stock is $50 per share, calculate the yield percentage on this preferred stock.

3. - 4. The common stock issued by Estate Enterprises currently has a beta of 1.3; the risk-free rate (R F) is an annual rate of 6%; and the market return (r m) is an annual rate of 12%. Using the

Explanation / Answer

1) C =12% = $120 , FV = $1000 , r = 0.14 , n = 5

P = [(C/r) * (1-1/(1+r)^5)] + FV/(1+r)^n

substituing values we get

P = $931.33

2) Dividend = 0.04*100 = $4

Current market price P =$50

Yield = (Dividend/P) * 100 =8%

3)RR = R F + Beta* (Market return -R F)

RR = 0.06 + 1.3*(0.12-0.06) = 0.138 = 13.8%

4)P = D1/(RR-g)

P = 5.2/(.138-0.03) = $48.148

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