Reference no: EM131512797

Debt and Equilty Valuation

Problem 1:

The Big Ben Company has issued bonds which now have 15 years to maturity. The bonds have a par value (i.e. face value) of $1,000, coupon rate of 9% and the coupon payment is made annually.

a) Calculate the value of the bond today under the following scenarios:
i. The Yield to Maturity is 9%
ii. The Yield to Maturity is 12%
iii. The Yield to Maturity is 5%

b) What is the relationship between the value of the bond today and the Yield to Maturity?

Problem 2:

The "Show Me the Money Company' has issued bonds with the following characteristics:

Face Value:             $1,000

Coupon Rate:            7%

Coupon Payments:  Annual

Maturity Date:         20 years from now

Assuming the price of the bond in the market today is $875, what is the YTM?

Problem 3:

Today, the Big Foot Shoe Company paid dividends of $1.50 per share of common stock. You are considering purchasing some stock in this company but don't want to pay too much for it. If an appropriate discount rate for this stock is 12%, what would be the price of the stock today under the following scenarios? (Note, if you purchased the stock today the first dividend you would receive would be in one year.):
a) Annual dividend payments would be constant and based on today's dividend.
b) Annual dividend payments would be constantly growing at a rate of 3%, and based on today's dividend.
c) What is the value of the growth (subtract a from b)?

Problem 4:
The Foogle Corporation thinks it's got the next greatest Internet search engine. It expects to make the following dividend payments (on a per share basis):
Year 1: $0
Year 2: $0
Year 3: $1.00 Year 4: $1.50 Years: $2.00
After Year 5 Foogle expects its dividend payments to grow at a constant rate of 2.5% forever. What is the value of one share of stock worth in Foogle today, assuming a discount rate of 14%?