1. Suppose that you know the risk free rates for different maturities:
Year Interest rate (%)
1 r1 = 8%
2 r2 = 9%
3 r3 = 10%
4 r4 = 11%
5 r5 = 12%
a) Determine the discount factors for each maturity (the present value of $1 received in t)?
b) Determine the present value and the YTM (yield to maturity) for the following T-bonds (Face value = 1000 $):
i) 2 year maturity and 4% coupon rate
ii) 5 year maturity and 6% coupon rate
iii) 5 year maturity and 10% coupon rate
2. Using the risk free rates in question 1, determine the price of a 3 year bond issued by i) Disney (spread 0,5%), ii) Boeing (spread 1%) and iii) InfoSoft (spread 2%) taking into account that the face value is $1.000, the coupon rate for the three bonds is 5% annually, and coupons are distributed every year.
3. Assume that a company with 1.000.000 shares has equity valued in 10.000.000€. Suppose the company reached its maturity stage such that its ROE coincides with the required return on equity (rE = 10%), and it is expected that it will remain constant in the future. Determine the share price.
4. The book value of equity of a firm at 31/12/2008 is 2.000 million euros. ROE is expected to stabilize in 2009 and to equal the required return on equity. If the payout ratio of the firm is 40%, the dividends are paid at the end of the year, and the required return on equity is 20%; determine the price per share on January 1st, 2009 taking into account that the company has 1.000 million issued shares.