Fin 571 Week 2

Text Problem Set

University of Phoenix

Finance 571

Professor Jeffery Dabbs

February 29, 2012

* Chapter 5

* 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?

* PV =Solve for element

* N = 20

* I = 9% annually (4.5%)

* Coupon Rate = $1,000 X .10 = $1000

* = $1065.04

* 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%?

* Value of stock: DPS 1/ Ks-g

* X (1.06)/(.1208-.06)

* V: 97.63

* A12

* (Required return for a preferred stock): James River $3.38 preferred is selling for $45.25. The preferred dividend is non-growing. What is the required return on Sony preferred stock?

* $3.38/$45.25 = 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 quarter). What is the stock worth?

* Dividend/Payment = $1.00

* Rate = 3%

* Stock Value = $1.00/.03 = $33.33

* B16

* (Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose PhilEl’s bonds have identical coupon rates of 9.125% but that one issue matures in 2 years, and the third in 15 years. Assume that a coupon payment was made yesterday.

* If the yield to maturity of all three bonds is 8%, what is the fair price of each bond?

* PMT= 1000x 9.125%= -91.25, -45.63...