# 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) =...

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