Week 2 Corporate Finance

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1. (Bond valuation) Michael Motors’ bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1000 par value and the coupon interest rate is 8 percent. The bonds have a yield to maturity of 9 percent. What is the current market price of these bonds?

Cash flow = 8% of 1,000 = 80 YTM or interest rate
n = 10 i = 9(%) PMT = 80 FV = 1000 PV = solve
PV=935.82

2. (Valuation a preferred stock) Susie’s Pet Supplies issued preferred stock with a state dividend of 10 percent at par. Preferred stock of this type currently yields 8 percent an the par value is $100. Assume dividends are paid annually. a) What is the value of Susie’s preferred stock?

b) Suppose interest rate levels rise to the point where the preferred stock now yields 12 percent. What would be the value of Susie’s preferred stock?
3. (Constant growth model) You are considering an investment in the common stock of Arizona Jake’s Corporation. The stock is expected to pay a dividend of $2 a share at the end of the year (D1 = $2.00) The stock has a beta equal to 0.9. The risk free rate is 5.6 percent and the market premium is 6 percent. The stock’s dividend is expected to grow at some constant rate g. The stock currently sells for $25 a share. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of three years? (That is, what is P3?)

4. (Bond valuation) Eagle Ventures has a bond issue outstanding with an annual coupon rate of 7 percent and 4 years remaining until maturity. The par value of the bond is $1,000. (a) Determine the current value of the bond if present market conditions justify a 14 percent required rate of return. Assume the bond pays interest annually. (b) Using the information above, what should be the current value if the bond had a semi-annual coupon instead of an annual coupon? (c) Assume an annual coupon but 20 years remaining to maturity. What is the current value under these...
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