Problem 1: Heather Smith is considering a bond investment in Locklear Airlines. The $1,000 par value bonds have a quoted annual interest rate of 9 percent and interest is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 15 years to maturity. Compute the price of the bonds based on semiannual analysis.
Problem 2: Stagnant Iron and Steel currently pays a $4.20 annual cash dividend (D0). They plan to maintain the dividend at this level for the foreseeable future as no future growth is anticipated.
Of the required rate of return by common stockholders (Ke) is 12 percent, what is the price of the common stock?
Problem 3: A firm pays a $3.80 dividend at the end of year one (D1), has a stock price of $50, and a constant growth rate (g) of 4 percent.
Compute the required rate of return (Ke).
Problem 4: Tom Busby owes $20,000 now. A lender will carry the debt for four more years at 8 percent interest. That is, in this particular case, the amount owed will go up 8 percent per year for four years. The lender then will require Busby to pay off the loan over 12 years at 11 percent interest. What will his annual payments be?
Problem 5:
A financial analyst is attempting to asses the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 10 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 45 percent, and eventually reach 60 percent during the maturity stage (IV).
a. Assuming earnings per share will be the following during each of the four stages, indicate the cash dividend per share (if any) during each stage.
Stage I $ .15
Stage II 1.80
Stage III 2.60
Stage IV 3.10
b. Assume in Stage IV that an investor owns 275 shares and is in a 31 percent tax bracket, what will be the investor's aftertax income from the cash dividend?
c. In what two stages is the firm most likely to utilize stock dividends or stock splits?
Problem 6:
Pittsburgh Steel Company has a convertible bond outstanding, trading in the marketplace at $930. The par value is $1,000, the coupon rate is 8 percent, and the bond matures in 25 years. The conversion price is $50 and the company's common stock is selling for $44 per share. Interest is paid semiannually.
a. What is the conversion value?
b If similar bonds, which are not convertible, are currently yielding 10 percent, what is the pure bond value of this convertible bond? (Use semiannual analysis as described in Chapter 10.)
Problem 7:
In problem 13, if the interest rate on similar bonds, which are not convertible, goes up from 10 percent to 12 percent, what will be the new pure bond value of the Pittsburgh Steel Company bonds? Assume the Pittsburgh Steel Company bonds have the same coupon rate of 8 percent as described in problem 13 and that 25 years remain to maturity. Use semiannual analysis.
Problem 8:
The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Based on the following facts, is she correct? (Show calculations to prove your answer.)
Debt can be issued at a yield of 10.6 percent, and the corporate tax rate is 35 percent. Preferred stock will be priced at $50, and pay a dividend of $4.40. The floatation cost on the preferred stock is $2.