1) Cabell Corp. bonds pay an annual coupon rate of 10%. If investors\' required

Question

1) Cabell Corp. bonds pay an annual coupon rate of 10%. If investors' required rate of return is now 12% on these bonds, they will be priced at

A) par value.

B) a premium to par value.

C) a discount to par value.

D) Cannot be determined without knowing the number of years to maturity.

2) Crandle's common stock is currently selling for $79.00. It just paid a dividend of $4.60 and dividends are expected to grow at a rate of 5% indefinitely. What is the required rate of return on Crandle's stock?

A) 11.11%

B) 11.76%

C) 12.2%

D) 14.21%

Explanation / Answer

1) C) a discount to par value. since market offers interest more than bonds coupon rate 2) A) 11.11% Ke= D1/p0+ g where D1 is dividend at the end of year =4.60*1.05 4.830 P0 is price at the beginning 79 g is growth rate 5% Ke= 4.83/79 + 5% Ke= 6.11% + 5% Ke=11.11%

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