Problem 1
Nonconstant Growth Stock Valuation
Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $0.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 80% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 10% per year. If the required return on the stock is 18%, what is the value of the stock today (assume the market is in equilibrium with the required return equal to the expected return)? Round your answer to the nearest cent. Do not round your intermediate computations.
Problem 2
Interest Rate Sensitivity
A bond trader purchased each of the following bonds at a yield to maturity of 9%. Immediately after she purchased the bonds, interest rates fell to 7%. What is the percentage change in the price of each bond after the decline in interest rates? Fill in the following table. Round your answers to two decimal places.
Problem 3
Bond Valuation and Interest Rate Risk
The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year.
What will be the value of each of these bonds when the going rate of interest is 7%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.