Question -
a. Assume that you are considering the purchase of a $1,000 par value bond that pays $70 each six months and has 10 years before it matures. If you buy this bond today, you expect to hold it for 5 years and then sell it in the secondary market. You (and other investors) currently require a nominal annual rate of 16 percent, but you expect the market to require a nominal rate of only 12 percent when you sell the bond (in 5 years) due to a general decline in interest rates. How much should you be willing to pay for this bond today (on December 4, 2011)?
Current Bond Price, VB, (12/4/2011) = ____________________.
b. Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $32.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of retained earnings common equity (rs) for Weaver Chocolate Co.? What would be the cost of equity from new common stock (re)?
Cost of Retained Earnings Common Equity (rs) = ____________________.
Cost of Newly Issued Common Stock (re) = ____________________.