Case 1:
CSM Corporation has a bond issue outstanding at the end of 2015. The bond has 15 years remaining to maturity and carries a coupon interest rate of 6%. Interest on the bond is compounded on a semiannual basis. The par value of the CSM bond is $1,000, and it is currently selling for $874.42.
Required:
a. Calculate the yield to maturity of the bond.
b. What is the price of the bond if the yield to maturity is 2% higher.
c. What is the price of the bond if the yield to maturity is 2% lower.
d. What can you summarize about the relationship between the price of the bond, the par value, the yield to maturity, and the coupon rate?
Case 2:
You are interested in purchasing the common stock of Azure Corporation. The firm recently paid a dividend of $3 per share. It expects its earnings and hence its dividends to grow at a rate of 7% for the foreseeable future. Currently, similar-risk stocks have required returns of 10%.
Required:
a. Given the data above, calculate the present value of this security. Use the constant growth model to find the stock value.
b. One year later, your broker offers to sell you additional shares of Azure at $73. The most recent dividend paid was $3.21, and the expected growth rate for earnings remains at 7%. If you determine that the appropriate risk premium is 6.74% and you observe that the risk-free rate, RF, is currently 5.25%, what is the firm's current required return, rAzure?
c. Determine the value of the stock using the new dividend and required return from part b.
d. Given your calculation in part c, would you buy the additional shares from your broker at $73 per share? Explain.
e. Given your calculation in part c, would you sell your old shares for $73? Explain.