Problem 1: Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is:
a. 7 percent.
b. 10 percent.
c. 13 percent.
Problem 2: Harrison Ford Auto Company has a $1,000 par value bond outstanding that pays 11 percent interest. The current yield to maturity on each bond in the market is 8 percent. Compute the price of these bonds for these maturity dates:
a. 30 years.
b. 15 years.
c. 1 year.
Problem 3: The preferred stock of Ultra Corporation pays an annual dividend of $6.30. It has a required rate of return of 9 percent. Compute the price of the preferred stock.
Friedman Steel Company will pay a dividend of $1.50 per share in the next 12 months (D1). The required rate of return (Ke) is 10 percent and the constant growth rate is 5 percent.
a. Compute P0.
b. Assume Ke, the required rate of return, goes up to 12 percent; what will be the new value of P0?
c. Assume the growth rate (g) goes up to 7 percent; what will be the new value of P0?
d. Assume D1 is $2, what will be the new value of P0?