Reference no: EM133061868

1) Consider a $25,000 par value bond with a 7 percent, semi-annual coupon and 10 years remaining until maturity.

a) If the bond's current market price is $24,625, what is its yield to maturity?

b) What is the bond's current yield?

c) What is the bond's capital gains yield?

d) Assuming market interest rates remain unchanged, what will be the bond's price one year from today? Calculate the percentage change in the bond's price over this year. How does this figure relate to the capital gains yield in part c?

2) Assuming the same par value and coupon rate, which will be more affected by a decline in market interest rates: a 30-year bond or a 10-year bond? Explain.

3) Suppose a nine-year, $1,000 par value bond with semi-annual coupon payments has a price of $1,050 and a yield to maturity of 4.25 percent. What is the bond's coupon rate?

4) Dellrose Corporation has a current price of $45.00, is expected to pay a dividend of $1.80 in one year, and its expected price right after paying that dividend is $50.40.

a) What is Dellrose's expected dividend yield?

b) What is Dellrose's expected capital gains yield?

c) What is Dellrose's (implied) equity cost of capital?

5) Bella Biotech will pay a dividend of $2.50 this year. If you expect Bella's dividend to grow by 5 percent per year, what should its price per share be if its equity cost of capital is 11 percent?

6) Kansaco plans to suspend its dividend for the next three years. You expect that when it does begin paying a dividend four years from now, its dividend will be $0.75 per share, and that this will grow by 4 percent per year thereafter. If Kansaco's equity cost of capital is 11%, what should be Kansaco's share price right now?

7) Bourbon County Mining (BCM) just announced it will cut its dividend from $4.80 to $3.75 per share and use the extra funds to expand. Prior to the announcement, BCM's dividends were expected to grow at a 4 percent rate, and its share price was $60. With the new expansion, BCM's dividends are expected to grow at a 6 percent rate. What share price would you expect after the announcement? (Assume BCM's risk is unchanged by the new expansion.) Is the expansion a positive NPV investment?

8) Liberal Holdings (LH) is privately held technology company based in southwest Kansas. You are in discussions to potentially acquire LH at the end of the year. Estimate the value of LH per share using a discounted FCF approach and the following data:

Debt: $40 million

Excess cash: $12 million

Shares outstanding: 5 million

Expected FCF: $4.5 million in each of the next eight years, growing after that by 4.5 percent per year for the foreseeable future

Weighted average cost of capital: 15 percent