Text Problems

FIN/HC571 - HEALTH CARE FINANCE

May 21, 2012.

Albert White

Text Problem Sets

Ch 5 (pp 134 – 137)

A3 (Bond valuation) General Electric made a coupon payment yesterday on its 6.75% bonds that mature in 8.5 yrs. If the required return on these bonds is 8% APR, what should be the market price of these bonds?

The following function was entered into a Microsoft Excel form: = PV (rate, nper, pmt, [fv], [type])

n=8.5 ×2=17, r=.082=.04, pmt= 6.75% × 10002=$$33.75, FV=$1000

PV= $923.96

A13 . (Required return for a preferred stock) Sony $4.50 preferred is selling for $65.50. The preferred dividend is nongrowing. What is the required return on Sony preferred stock?

PVPerpetuity = D / r

r = D / PV

r = $4.50 / $65.50 = 6.87%

A15 (Stock valuation) Let us say the Mill Due Corporation is expected to pay a dividend of $5.00 per year on its common stock forever into the future. It has no growth prospects whatsoever. If the required return on Mill Due's common stock is 14%, what is a share worth?

P0 = D1 / (r - g)

P0 = $5.00 / (0.14 - 0.00) = $35.71

B15 (Interest-rate risk) A quick look at bond quotes will tell you that GMAC has many different

issues of bonds outstanding. Suppose that four of them have identical coupon rates of

7.25% but mature on four different dates. One matures in 2 years, one in 5 years, one in

10 years, and the last in 20 years. Assume that they all made coupon payments yesterday.

a. If the yield curve were flat and all four bonds had the same yield to maturity of 9%,

what would be the fair price of each bond today? 7.25%

b. Suppose that during the first hour of operation of the capital markets today, the term

structure shifts and the yield to maturity of all these bonds changes to 10%. What is the

fair price of each bond now? ???????

c. Suppose that in the second hour of trading, the yield to maturity of all these bonds

changes once more to 8%. Now what is the fair price of each bond? 8%

d....