Fin571 Week 3 Problems

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 *% 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

A5. (Yield Maturity) New Jersey Lighting has a 7% coupon bond maturing in 17 years. The current market price of the bond is $975. What is the bond’s yield to maturity?

Bo= CPN 2 (1+r2)2N- 1r2(1+r2)2N+1,0001+r22N

When solving for a bond’s expected return or YTM the equation above is used with minor changes: current market price is entered and the equation is solved for r or enter the following fx into excel =YIELDMAT

The following function was entered into a Microsoft Excel form:

= YIELDMAT (settlement, maturity, issue, rate, pr, [basis])

n=17×2=34 PV=$975; PMT .07×1,000 ×2=$35; FV=$1,000;

r=3.6292%

YMT=3.6262 ×2=7.2583%

A8. Mead is expected to pay a $1.40 dividend in the next year and to sell for $68 in one year. Discounted at a required return of 12%, what is the value of one share of Mead today?

P0=Dt+1(r-g)

P0=1.40(.12-0)

P0= 11.66

Current Value = $68-11.66 = $56.34

A11.

A12. James River $3.38 preferred is selling for $45.25. The preferred dividend is nongrowing. What is the required return on James River preferred stock?

PVPerpertuity=D÷r

r=$3.3845.25=7%

A15. Mill Due Corporation is expected to pay a dividend of $5 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 the share worth?

Po=D1r-g

Po=$5.14-0.00= 35.71

Po= $35.71

β=0068.005= .85