Question

1. Jackson Corporation's bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds have a yield to maturity of 11%. What is the current market price of these bonds? Do not round intermediate calculations. Round your answer to the nearest cent.

2. Wilson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity? Round your answer to two decimal places.

3. The real risk-free rate is 2%, and inflation is expected to be 2% for the next 2 years. A 2-year Treasury security yields 4.7%. What is the maturity risk premium for the 2-year security? Round your answer to one decimal place.

4. Renfro Rentals has issued bonds that have a 7% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 6.5%. What is the price of the bonds? Round your answer to the nearest cent.

5. You just purchased a bond that matures in 5 years. The bond has a face value of $1,000 and an 8% annual coupon. The bond has a current yield of 8.21%. What is the bond's yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

6. Boehm Incorporated is expected to pay a $2.20 per share dividend at the end of this year (i.e., D₁ = $2.20). The dividend is expected to grow at a constant rate of 8% a year. The required rate of return on the stock, r_s, is 17%. What is the estimated value per share of Boehm's stock? Do not round intermediate calculations. Round your answer to the nearest cent.

7. Nick's Enchiladas has preferred stock outstanding that pays a dividend of $4 at the end of each year. The preferred sells for $60 a share. What is the stock's required rate of return (assume the market is in equilibrium with the required return equal to the expected return)? Round the answer to two decimal places.

8. A company currently pays a dividend of $3 per share (D₀ = $3). It is estimated that the company's dividend will grow at a rate of 22% per year for the next 2 years, and then at a constant rate of 5% thereafter. The company's stock has a beta of 1.3, the risk-free rate is 9%, and the market risk premium is 5%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.

9. You buy a share of The Ludwig Corporation stock for $20.00. You expect it to pay dividends of $1.11, $1.1766, and $1.2472 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $23.82 at the end of 3 years.

A. Calculate the growth rate in dividends. Round your answer to two decimal places.

B. Calculate the expected dividend yield. Round your answer to two decimal places.

C. Assuming that the calculated growth rate is expected to continue, you can add the dividend yield to the expected growth rate to obtain the expected total rate of return. What is this stock's expected total rate of return (assume market is in equilibrium with the required rate of return equal to the expected return)? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Answer to Question 1:

Par Value = $1,000

Annual Interest Rate = 10%
Annual Interest = 10% * $1,000
Annual Interest = $100

Time to Maturity = 10 years
Annual YTM = 11%

Current Price = $100 * PVIFA(11%, 10) + $1,000 * PVIF(11%, 10)
Current Price = $100 * (1 - (1/1.11)^10) / 0.11 + $1,000 * (1/1.11)^10
Current Price = $100 * 5.889232 + $1,000 * 0.352184
Current Price = $941.11

Answer to Question 2:

Par Value = $1,000
Current Price = $850

Annual Interest Rate = 10%
Annual Interest = 10% * $1,000
Annual Interest = $100

Time to Maturity = 12 years

Let Annual YTM be i%

$850 = $100 * PVIFA(i%, 12) + $1,000 * PVIF(i%, 12)

Using financial calculator:
N = 12
PV = -850
PMT = 100
FV = 1000

I = 12.48%

Yield to Maturity = 12.48%