1. A company’s bonds have a par value of $1,000 par, 7.8% coupon rate and 30-yea
ID: 2650551 • Letter: 1
Question
1.A company’s bonds have a par value of $1,000 par, 7.8% coupon rate and 30-year maturity. The bonds currently sell for $1,107.20 and pay coupon semi-annually. What is the bonds' yield to maturity?
2.A Company's last dividend was $1.35. The dividend growth rate is expected to be constant at 3.5% forever. The required return on this company is 11%. What is the current stock price based on the constant growth model?
3.The company's beta is 1.25, the market risk premium is 8.50%, and the risk-free rate is 4.50%. What is the company's required return using CAPM?
4.A company’s stock has a beta of 1.13. The market return is expected to be 11.75%, and the risk-free rate is 4.35%. What is the required rate of return on this company?
5.A preferred stock is expected to pay a dividend of $2.5 forever. If the required return on the preferred stock is 12%, what is its current market price?
6.A company’s bonds currently sell for $1,150 and have a par value of $1,000. They have a 6.35% coupon rate with quarterly payments and a 20-year maturity. What is the YTM on these bonds?
7.A company’s stock has a beta of 0.75. The required return based on CAPM is 11.75%, and the risk-free rate is 4.35%. What is the expected return on the market?
8.A company is expected to pay a dividend of $0.75 per share next year, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. If the required return is 12%, what is this company’s price based on the constant growth model?
9.A company’s stock price is $23.45 in the market, and this company’s dividend is expected to grow at the constant growth rate of 4% forever. The last dividend paid by this company was $1.20. What is the dividend yield for this company?
10.A company’s stock price is $23.45 in the market, and this company’s dividend is expected to grow at the constant growth rate of 4% forever. The last dividend paid by this company was $1.20. What is the required return on this company?
Explanation / Answer
1)YTM=[Interest +(redemption price- Issue price)/Number of years]/[(Redemption price +issue price)/2]]
=[78 +(1000-1107.20)/30]/[(1000+1107.20)/2]
= [78-3.5733]/[2107.20/2]
=74.4267/1053.60
=.07064
or 7.064 %
2)current stock price = Dividend(1+growth )/(Cost of equity -growth)
= 1.35(1+.035)/(.11-.035)
= 1.39725/.075
=$18.63 per share
3)CAPM = Risk free rate + Beta *risk premium
=4.50 +1.25*8.50
= 4.50 +10.625
= 15.125%
4)Using CAPM model,required return =Risk free rate +beta(retun on market-risk free rate)
=4.35+1.13(11.75-4.35)
= 4.35+ 8.362
5)current price = Dividend *100 / Expected return
= 2.5*100/12
= $20.833per share
6)YTM =[15.875 +(1000-1150)/80]/[(1150+1000)/2]
= [15.875 -1.875]/[2150/2]
=14/1075
=1.30%
7)using CAPM model , expected return on stock =risk free rate+beta(return on market-risk free rate)
11.75 =4.35 + .75(X-4.35)
11.75-4.35 = .75X-3.2625
7.40 +3.2625 = .75X
X= 10.6625/75
X= Return on market = 14.217%
8)Current price per share = Dividend of next year /(Cost of equity - growth )
=.75/(.12-.065)
= .75/.055
= $ 13.64 per share.
9)Dividend yield = Current dividend / current market price
= 1.20 (1+.04) / 23.45
=1.248/23.45
=.0532 or5.32 %
10) 23.45 = 1.20(1+.04)/(X-.04)
( X-.04) = 1.248/23.45
x -.04 = .0532
x (required return ) = .0532 + .04
= .0932 or 9.32 %
= 12.712%
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