Week 4

Individual Assignment: Text Problem Sets

• Resources: Assigned Readings.

• Follow these steps to complete the assignment for this week:

o Navigate to the following link: http://www.pearsoncustom.com/uop/mba/

o Select Introduction to Finance.

o Read the Introduction.

o Select Ch. 1, 2, 5, or 7 and begin. The Readiness Assessment Quizzes are located on the left-hand menu once you select a chapter.

• Complete the following problem sets and show all steps:

o Ch. 5: Problems A1, A10, A12, A14, B16, B18, & B20 (pp. 134-137)

o Ch. 7: Problem C1 (p. 184)

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?

Price is the present value of interest and principal discounted at 9%. The annual interest is 1,000X7.4%=$74, principal amount is $1,000, years to maturity are 10 and the discounting rate is 9%. Interest is an annuity and so we use the PVIFA table. Principal is a lump sum and so we use the PVIF table.

Price = 74 X PVIFA (10,9%) + 1,000 X PVIF (10,9%)

Pride = $897.32

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%?

Since the dividends are growing at a constant rate, we use the constant growth formula to get the current market value.

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 dividend is non-growing. What is the required return on James River preferred stock?

A preferred stock is a perpetuity and for a perpetuity

Required return...