Fin 3322

Bonds and Stocks Homework

1. The bonds issued by Jensen & Son bear a 6% coupon, payable semiannually.
The bond matures in 8 years and has a $1,000 face alue. !urrently, the bond
sells at par. "hat is the yield to maturity#
I bond will only sell at pay when its coupon payment equals its yield to maturity.
6
$. The %erry"eather &irm 'ants to raise $10 million to e(pand its business. To
accomplish this, it plans to sell )0*year, $1,000 face alue +ero*coupon bonds.
The bonds 'ill be priced to yield 6%. "hat is the minimum number of bonds it
must sell to raise the $10 million it needs#
!he price o" each bond will be #$$$ % #.$6&3$ ' #().##
#$*$$$*$$$ % #().## ' +(*)3).,+
!here"ore* -erry.eather needs to sell +(*)3+ bonds
). , corporate bond 'ith a face alue of $1,000 matures in - years and has a 8%
coupon paid at the end of each year. The current price of the bond is $.)$.
"hat is the yield to maturity for this bond#
/ ' )
I%0 ' 1
23 ' 4,32
2-! ' 5$
F3 ' #*$$$
I%0 ' #$.#+
-. "eisbro and Sons common stoc/ sells for $$1 a share and pays an annual
diidend that increases by 0% annually. The mar/et rate of return on this stoc/
is .%. "hat is the amount of the last diidend paid by "eisbro and Sons#
2#' 6i7 % 8.$,4.$+9
6i7 ' 2# : 8.$)9 ' $.5)
Howe7er this is the ne;t di7idend not the last one
6i7# ' 6i7$ : 8# < =9
$.5) ' 6i7$ : 8#.$+9
6i7$ ' $.5) % #.$+ ' $.5$
0. !an1t 2old %e 3ac/, 4nc. is preparin5 to pay its first diidends. 4t is 5oin5 to
pay $1.00, $$.00, and $0.00 a share oer the ne(t three years, respectiely.
,fter that, the company has stated that the annual diidend 'ill be $1.$0 per
share indefinitely. "hat is this stoc/ 'orth to you per share if you demand a
6% rate of return#
First* we can =et the 7alue o" the stock* when it is
actin= like a perpetuity 8year ) and beyond9
#.2+ % .$( ' #(.56 > year 3
!hen discount back the "our cash "lows
# % #.$( < 2.+$ % #.$(&2 < + % #.$(&3 < #(.56 % #.$(&3
2#.(5
6. 7o' or 8ater, 4nc. recently paid $1.10 as an annual diidend. &uture diidends
are pro9ected at $1.1-, $1.18, $1.$$, and $1.$0 oer the ne(t four years,
respectiely. ,fter that, the diidend is e(pected to increase by $% annually.
"hat is one share of this stoc/ 'orth to you if you re:uire an 8% rate of return
on similar inestments#
First* we can =et the 7alue o" the stock* when it is
actin= like a perpetuity 8year + and beyond9
8#.2+:#.$29 % 8.$54.$29 ' 2#.2+ > year )
!hen discount back the + cash "lows
#.#) % #.$5 < #.#5 % #.$5&2 < #.22 % #.$5&3 < #.2+ % #.$5&) < 2#.2+ % #.$5&)
#,.+(
6. %other and ;au5hter <nterprises is a relatiely ne' firm that appears to be on
the road to 5reat success. The company paid its first annual diidend yesterday
in the amount of $.$8 a share. The company plans to double each annual
diidend payment for the ne(t three years. ,fter that time, it is plannin5 on
payin5 a constant $1.00 per share indefinitely. "hat is one share of this stoc/
'orth today if the mar/et rate of return on similar securities is 11.0%#
2art # is the ?rowin= @nnuity
8@9 23$ ' $.+6%8$.##+4#9 : A#482%#.##+9
3
B ' 3.$2
2art 2 is the ?rowin= 2erpetuity
#.+ % .##+ ' #3.$) > year 3
8B9 23$ ' #3.$)%8#.##+
3
9 ' ,.)#
!he price o" the stock today is #2.)3
8. 3! =n ; 9ust paid its annual diidend of $.60 a share. The pro9ected diidends
for the ne(t fie years are $.)0, $.00, $.60, $1.00, and $1.$0, respectiely. ,fter
that time, the diidends 'ill be held constant at $1.-0. "hat is this stoc/ 'orth
today at a 6% discount rate#
First* we can =et the 7alue o" the stock* when it is
actin= like a perpetuity 8year 6 and beyond9
#.) % .$6 ' 23.33 > year +
!hen discount back the si; cash "lows
.3 % #.$6 < .+ % #. $6&2 < .(+ % #. $6&3 < # % #. $6&) < #.2 % #. .$6&+ < 23.33 % #. $6&+
2$.)5
.. The &eli( !orp. pro9ects to pay a diidend of $.60 ne(t year and then hae it
5ro' at 1$% for the follo'in5 ) years before 5ro'in5 at 8% indefinitely
thereafter. The e:uity has a re:uired return of 10% in the mar/et. The price of
the stoc/ should be >>>>.
.
0ear $ 0ear # 0ear 2 0ear3 0ear ) 0ear +
$.(+ $.(+:#.#2 $.(+:#.#2
2
$.(+:#.#2
3
$.(+:#.#2
3
:#.$5
2art # is the ?rowin= @nnuity
23$ ' $.(+%8$.#4$.#29 : A#48#.#2%#.#9
)
B ' 2.5$2++,
2art 2 is the ?rowin= 2erpetuity
6i7+ ' $.(+ : #.#2
3
: #.$5 ' #.#3(,,2
23) ' #.#)%8$.#4$.59 ' +(
2art 3 Brin= it back to time $
23$ ' +(%8#.#
)
9 ' 35.,3
2art ) @dd them to=ether
23 ' 35.,3 < 2.$5 ' )#.(3
10. ;octors*?n*!all, a ne'ly formed medical 5roup, 9ust paid a diidend of $.00.
The company1s diidend is e(pected to 5ro' at a $0% rate for the ne(t 0 years
and at a )% rate thereafter. "hat is the alue of the stoc/ if the appropriate
discount rate is 1$%#
0ear $ 0ear # 0ear 2 0ear3 0ear ) 0ear + 0ear 6
$.+ $.+:#.2 $.+:#.2
2
$.+:#.2
3
$.+:#.2
)
$.+:#.2
+
$.+:#.2
+
:#.$3
2art # is the ?rowin= @nnuity
23$ ' 8$.+:#.29%8$.#24$. 29 : A#48#.2%#.#29
+
B ' 3.$5,+)(
2art 2 is the ?rowin= 2erpetuity
6i76 ' $. + : #.2
+
: #.$3 ' #.25#)5+
23+ ' #.25%8$.#24$.$39 ' #).235(2
2art 3 Brin= it back to time $
23$ ' #).2)%8#.#2
+
9 ' 5.$5
2art ) @dd them to=ether
23 ' 3.$, < 5.$5 ' ##.#(