Problem 1 Seven years ago a semi-annual coupon bond with a 10% coupon rate, $1,000 face value and 15 years to maturity was issued by Corn Inc.. Teddy bought this bond two years ago when the market interest rate was 12%. And now the market interest rate is 5%. If teddy sells the bond now, what is Teddy’s capital gain/loss yield on the bond investment?
Problem 2 Arena Distributors is a new company and currently pays no dividends. The company has just reported earnings of $1.5 per share and its earnings are expected to grow at a 15 percent annual rate over the next four years. Following this four-year high growth period earnings will grow at 5 percent per year forever. Starting at the end of year 5, Arena will distribute 20 percent of the previous year’s earnings in the form of dividends. The required rate of return is 10 percent (EAR). Calculate the value of Arena’s share.
Problem 3 Richard Sharpe expects Hawkeswill Enterprises to earn $10 per share next year, and this company will start paying out 50% of the earnings per share (EPS) in dividend. He expects the earnings to grow at 10% per year during the following two years, then 5% per year for another three years. After that, the earnings will grow at 1% for the foreseeable future. If the discount rate for Hawkeswill is 8% (EAR), how much will Sharpe pay for a share?
Problem 4 A stock currently sells for $90 and has just paid $3 in dividends (the check was mailed out yesterday). If the next dividend is expected in one year and investors expect that the dividend will grow at a constant rate indefinitely. What is the growth rate? Suppose the discount rate is 10%.
Problem 5 Ron Weasley expects that Gringot Inc. can earn $10 million indefinitely if it makes no new investment. He also knows that Gringots has an investment opportunity to add a line of kitchen and bathroom cabinets to the business. The immediate outlay for this project is $1 million today, and the new business will generate $0.5 million per year from year 1 to year 3. If there are 1 million Gringot shares outstanding and the discount rate is 10%, how much will Ron pay for a share of Gringot?