Reference no: EM133060597

1. Fast and Loose Company has outstanding an 8 percent, four-year, $1,000-par-value bond on which interest is paid annually.

a. If the market required rate of return is 15 percent, what is the market value of the bond?

b. What would be its market value if the market required return dropped to 12 percent? To 8 percent?

c. If the coupon rate were 15 percent instead of 8 percent, what would be the market value [under Part (a)]?

If the required rate of return dropped to 8 percent, what would happen to the market price of the bond?

2. James Consol Company currently pays a dividend of $1.60 per share on its common stock. The company expects to increase the dividend at a 20 percent annual rate for the first four years and at a 13 percent rate for the next four years, and then grow the dividend at a 7 percent rate thereafter. This phased-growth pattern is in keeping with the expected life cycle of earnings. You require a 16 percent return to invest in this stock. What value should you place on a share of this stock?

3. A $1,000-face-value bond has a current market price of $935, an 8 percent coupon rate, and 10 years remaining until maturity. Interest payments are made semiannually. Before you do any calculations, decide whether the yield to maturity is above or below the coupon rate. Why?

a. What is the implied market-determined semiannual discount rate (i.e., semiannual yield to maturity) on this bond?

b. Using your answer to Part (a), what is the bond's (i) (nominal annual) yield to maturity?

(ii) (effective annual) yield to maturity?

4. A zero-coupon, $1,000-par-value bond is currently selling for $312 and matures in exactly 10 years.

a. What is the implied market-determined semiannual discount rate (i.e., semiannual yield to maturity) on this bond? (Remember, the bond pricing convention in the United States is to use semiannual compounding - even with a zero-coupon bond.)

b. Using your answer to Part (a), what is the bond's (i) (nominal annual) yield to maturity? (ii) (effective annual) yield to maturity?

5. Just today, Acme Rocket, Inc.'s common stock paid a $1 annual dividend per share and had a closing price of $20. Assume that the market expects this company's annual dividend to grow at a constant 6 percent rate forever.

a. Determine the implied yield on this common stock.

b. What is the expected dividend yield?

c. What is the expected capital gains yield?