# Text Problem Sets

Pages: 2 (369 words) Published: December 3, 2012
Text Problem Sets

A1. (Bond valuation) A \$1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond? Number of years (N) = 10, future value (FV) = 1000, interest rate (I/YR) = 9 0.074 * 1000 = 74 = PMT or annual payment, I then pressed CPT on my financial calculator to compute the price of the bond and then pressed PV or present value. The fair value of the bond is \$897.32.

Using Cash Flow of \$1000 to calculate present value,
Cash flow= \$1000
PV factor = 1/(1+i)^n = 0.42241
PV = \$1000*0.42241= 422.41
Using coupon rate to calculate present value of annuity
Cash flow= \$1000 * 7.4/100 = \$74
PV factor = (1/i)*(1- 1/(1+i)^n) = 6.4176
So, PV = \$74*6.4176 = 474.90|
So the fair value of bond = 474.90+422.41 = \$897.31
A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of \$5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%?

Current market value = D1/(Required return – growth rate) = 5.60/(10%-6%) = \$140 A12. (Required return for a preferred stock) James River \$3.38 preferred is selling for \$45.25. The preferred dividends is now growing. What is the required return on James River preferred stock?  Required Return = Dividend/Market Price

Dividend = \$3.38
Market Price = \$45.25
Required Return = \$3.38 / \$45.25
Required Return = 7.47%

A14.(Stock Valuation) Suppose Toyota has nonmaturing (perpetual) preferred stock outstanding that pays a \$1.00 quarterly dividend and has a required return of 12% APR (3% per quarterly). What is the stock worth? Perpetual Quarterly Preferred Dividend (D) = \$1.00

Annual Dividend (\$1.00 x 4.00) = \$4.00
Annual Percentage Rate (APR) = 12%
Preferred Stock Value (P0) = (D / R)
Preferred Stock Value (P0) =...