1. Sentry Cop. Bonds have a coupon payment of 7.25%. The bonds have a par value of $1000, a current price of $1125, and they will mature in 13 years.
a) What is the yield to maturity on these bonds if it pay coupon annually?
b) What is the yield to maturity on these bonds if it pay coupon semiannually?
2. One year ago L&L Co. issued 15-year, non-callable, 7.5% annual coupon bonds at their par value ($1000). Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds if this is a non-callable bond?
3. Currently, McCue Inc.'s bonds currently sell for $1,250. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)
4. A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its current rate, what will the price be 5 years from now?
5. Zumwalt Corporation's Class S bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months), and those bonds sell at their par value. Zumwalt's Class A bonds have the same risk, maturity, and par value, but the A bonds pay a 5.75% annual coupon. Neither bond is callable. At what price should the annual payment bond sell? (hint: Bonds with same risk should have same effective rate of return, or YTM).
6. A firm plans to pay an annual dividend of $0.48 next year. Dividends and earnings have been growing at a compound annual rate of 8 percent and are expected to continue growing at that rate. What is an investor's required rate of return on the firm's common equity if the current price of its stock is $12 per share?
7. Over the past 7 years the dividends of a company have grown from $0.24 to the current level of $.53. What is the approximate annual compound growth rate of dividends for this company?
8. The earnings and dividends of a firm are expected to grow at an annual rate of 15 percent over the next 4 years and then slow to a constant growth rate of 8 percent per year thereafter. The firm currently pays a dividend of $0.50 per share (D0 = $0.50). What is the value of this firm's stock to an investor who requires a 14 percent rate of return?
9. Over the past 5 years the earnings per share (EPS) of a local firm have grown from $0.62 to $0.91. If an investor in this firm is assumed to have a required rate of return of 14%, what is the current value of its common stock if its crrent dividend is 0.12 (D0 = $0.12)? Assume EPS (and therefore its dividends per share) will continue to grow at a constant rate.
10. A company's stock currently pays a dividend of $1.20 per share (D0 = $1.20). Dividends are expected to increase at the rate of $0.10 per share for the next eight years. Determine the current value of this stock to an investor who expects to be able to sell the stock for $28 after 5 years. Assume that the investor requires a 12 percent rate of return on the security.
11. A company's common stock is selling for $16. The stock just paid a dividend (D0) of $.60 and this dividend is expected to grow by 15% per year for three years. After that it will grow at a constant rate of 4%. The stock's beta is 1.7, the risk-free rate of interest is 1.75% and the market risk premium is 5.25%. According to the DCF model, what is the intrinsic value of the stock today? Given the current stock price today (P0 = $16), should you buy the stock and briefly explain why or why not?
12. A start-up was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value?
Year 0 1 2 3 4 5 6
Growth rate NA NA NA NA 50.00% 25.00% 8.00%
Dividends $0.000 $0.000 $0.000 $0.250 $0.375 $0.469 $0.506