1. After a sharp change in interest rates, newly issued bonds generally sell at yields different from those of understanding bonds of the same quality. One suggested explanation is that there is a difference in the value of the call provisions. Explain how this could arise.
2. Laurel Enterprises has earnings this year of $4 per share and has a 40% retention rate, which it plans to keep constant. Its equity cost of capital is 10%, which is also its expected return on new investment. Its earnings are expected to grow forever at a rate of 4% per year. If Laurel Enterprises has just paid its dividend this year and its next dividend is due in one year, what do you estimate the firm’s current stock price to be?