Reference no: EM132379027

1. Ellison company just issued a bond with 15% annual coupon interest rate on a $1,000 par value bond with 15 years left to maturity. Bonds of same maturity now sell to yield 13% return

(a) How much would you be willing to pay for one of these bonds today? Why?

(b) If the bond is selling for $1,300 what is the yield to maturity? Would the YTM reflect long-term rates, or short-term rates? Explain.

(c) What is the relationship between the price of the bond and its YTM, and the risk and it's YTM?

Question 2

NOTE YOU MUST SHOW HOW YOU ARRIVED AT YOUR ANSWERS:

(A). John's company's just paid a dividend of $3.50 per share on its stock and the dividends are expected to grow at a constant rate of 6% per year. If the required rate of return on this stock is 11%, what is value of this stock?

(b). Thomas Brothers stock is selling for $11.00 per share and it is expected to pay a $0.95 per share dividend at the end of the year. The dividend of the stock is expected to grow at a constant rate of 6% per year. What is expected rate of return on the stock? 

(c). Johnson Manufacturing is expected to pay a dividend of $2.25 per share at the end of the year. The stock sells for $34.50 per share, and its required rate of return is 11.0%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

(d) What are the implications if the growth rate is incorrectly forecasted, and it exceeds the required rate of return? Can you still use the model in evaluating the value of a stock? How?