Week 4 – Assignment Problems
P3 Bond prices and yields
Assume that the Financial Management Corporation’s $1,000-par-value bond has a 5.700% coupon, matured on May 15, 2017, had a current price quote of 97.708, and had a yield to maturity (YTM) of 6.034%.
Given this information, answer the following questions:
a. What was the dollar price of the bond?
b. What is the bond’s current yield?
c. Is the bond selling at par, at a discount, or at a premium? Why?
d. Compare the bond’s current yield calculated in part b to it’s YTM and explain why they differ.
P2 Basic bond valuation
Complex Systems has an outstanding issue of $1,000-par-value bonds with a 12%
coupon interest rate. The issue pays interest annually and has 16 years remaining to its maturity date.
a. If bonds of similar risk are currently earning a 10% rate of return, how much should Complex Systems bond sell for today?
b. Describe the two possible reasons why the rate on similar-risk bonds is below the coupon interest rate on the Complex Systems bond.
c. If the required return were at 12% instead of 10%, what would the current value of Complex Systems’ bonds be? Contrast this finding with your findings in part a and discuss.
P3 Common stock value – Constant Growth
McCracken Roofing, Inc., common stock paid a dividend of $1.20 per share last year. The company expects earnings and dividends to grow at a rate of 5% per year for the foreseeable future.
a. What required rate of return for this stock would result in a price per share of $28?
b. If McCracken expects both earnings and dividends to grow at an annual rate of 10%, what required rate of return would result in a price per share of $28?