Question

Use Excel template provided in Canvas to set up and solve the following problems: pays 1. Bond A is a premium bond that pays semiannually with a coupon rate of 5.50%. Bond annually and has a coupon rate of 3.50% and currently sells at a discount. Both have a YTM of 4.50%, and 10 years to maturity. What is the current price for Bond A? What will the price be in one year for Bond A? What is the current price for Bond K? What will the price be in one year for Bond K? What is the current yield for each bond? If interest rates remain unchanged. what is the expected capital gains yield over the next year for Bond A? For Bond K? 2. Jaco Storage just paid a dividend of $2.55 per share. The company will increase its dividend by 20% next year and will then reduce its dividend growth rate to 15% in year 2, 12.50% in year 3 and 7.5% in year 4. After year 4. JaCo will sustain its industries average of 5% dividend growth per year, and remain constant at 5% forever. If the required return on JaCo Storage stock is 8.00%, what is the share price in year 4? What is the share price today? What price must an investor pay today if s/he requires a 12% return? 3. Patsy's Popsicle Stand is considering expanding nationwide (Scenario A) or limiting their expansion plan to remain within their current home state (Scenario B). The company cannot afford to do both, making the two choices mutually exclusive. The initial cash outlay and projected income streams are shown below: Year Cash Flow (A)Cash Flow (B) -$600,000 -$125,000 175,000 40,000 225,000 50,000 275,000 65,000 300,000 75,000 As an entrepreneur, Patsy requires a minimum rate of return of 15.00%. Complete the Exce to compare each of the decision criteria a-e below and briefly explain your final answer in a. Payback criteria and why? b. Discounted Payback criteria and why? C. NPV and why? d. IRR and why?

Answer 1

Question 1

Let us assume the face value of both the bonds is $1000

Current Prices of Bonds

Particulars	Excel Sign	Bond A	Bond K
Coupon	pmt	27.5	35
Period	Nper	20	10
YTM	Rate	2.25%	4.50%
Face Value	FV	1000	1000
Current Price	PV	1080	921

Excel Formula =PV(rate,nper,pmt,FV)

Bond A =PV(2.25%,20,27.5,1000) = $1080

Bond K =PV(4.5%,10,35,1000) = $921

Bond A is a semi-annual payment bond therefore, its semiannual coupon payment would be (5.5%*1000/2) = $27.5

It's coupon payment would be double, i.e. in 10 years it would make 20 coupon payment

Being a semiannual bond its YTM for the calculation would become half (4.5%/2=2.25%)

Bond K is annual coupon payment bond, its annual coupon payment would be (3.5%*1000) = $35

Its coupon payment would be for 10 years, therefore, the period would be 10

Being an annual bond its YTM for calculation would be 4.5%

Prices of Bond in One Year

Particulars	Excel Sign	Bond A	Bond K
Coupon	pmt	27.5	35
Period	Nper	18	9
YTM	Rate	2.25%	4.50%
Face Value	FV	1000	1000
Price in One Year	PV	1073	927

Excel Formula =PV(rate,nper,pmt,FV)

After 1 year the only thing that will change will be Nper or the period as for Bond A would have made two coupon payment their coupon payment remaining would be 18 and for bond K the remaining coupon payment would be 9

Expected Capital Gain Yield in One Year

Particulars	Bond A	Bond K
Current Price	1079.82	920.87
Price in One Year	1073.34	927.31
Capital Gain	-6.48	6.44
Face Value	1000	1000
Capital Gain Yield	-0.65%	0.64%

Capital Gain Yield = Capital Gain/Face Value

Current Yield on Each Bond

The Current Yield of each bond will be equal to the YTM which is 4.5%