Problem 1) Consider a bond paying an annual coupon of $80 with a face value of $1,000. Calculate the yield to maturity if the bond has:
a. 20 years remaining to maturity and is priced at $1,200
b. 10 years remaining to maturity and is priced at $950
Problem 2) Consider the stock of Davidson Company, which will pay an annual dividend of $2 one year from today. The dividend will grow at a constant annual rate of 5 percent, forever. The market requires a 12 percent return on the company's stock.
a. What is the current price of a share of the stock?
b. What will the stock price be in 10 years from today?
Problem 3) Juggernaut Satellite Corporation earned $10 million for the fiscal year ending yesterday. The firm also paid out 25 percent of its earnings as dividends yesterday. The firm will continue to pay out 25 percent of its earnings as annual, end-of-year dividends. The remaining 75 percent of earnings is retained by the company for use in projects. The company has 1.25 million shares of common stock outstanding. The current stock price is $30. The historical return on equity (ROE) of 12 percent is expected to continue in the future. What is the required rate of return on the stock?