1. DBS Corp. has a credit rating of A and is planning to issue 17-yearbonds with a 12.25% annual coupon rate paid annually. Recently, 17-year bonds were issued by MSTCorp.,a company with a credit rating of A, with an 11% coupon rate paid annually which sold at a price of $910.
a. What should be the price of a DBS bond when it is issued?
b. What is the current yield of the DBS bond two years later if selling for $1200 at that time?
c. After four years, the price of a DBS bond is $1045. What is the bond's new yield to maturity? d. If you bought a DBS bond at the price when issued and sold it at the price in c. above, what would be your holding period rate of return?
e. Instead of HPR, what would be the compound annual rate of return you realize for the transactions in d. above?
2. A publicly-traded firm that announced its earnings per share for next year of $3.50. The company pays out dividends at a rate of 20% of its earnings. It expects earnings to grow by 10% into the second year. Beginning in year three, growth is expected to be a constant but at an unknown rate.
The publicly traded firm benchmarks itself against a competitor that is approximately the same size and competes vigorously against them on a price basis for market share. The investors of the competitor expect annual returns of 16%.
a. Assume this publicly traded company earns an 8% return on equity. What is the constant growth rate that should be used to calculate its price at the end of the third year?
b. Project Dividend1, Dividend2, and Dividend3 on a per share basis.
c. What should be the price of a share of stock at the end of second year?
d.At what price should a share of this publicly traded company stock sell for today?
e.Assume you bought a share of this publicly traded company last year for $8 and earned a 3% holding period return. What was the dividend earned if you sold at the price in d. above?