FIN4131 BOND AND STOCK (QnA)

1.
1. Red Mountain, Inc. bonds have a face value of $1,000. The bonds carry a 7 percent coupon, pay
interest semiannually, and mature in 13.5 years. What is the current price of these bonds if the yield
to maturity is 6.82 percent?
FV=1000
PMT=1000X7%/2=35
N=13.5X2=27
I/Y=6.82/2=3.41%
PV=1015.17
Since coupon rate >YTM, PV>FV
2. A six-year, semiannual coupon bond is selling for $991.38. The bond has a face value of $1,000 and a
yield to maturity of 9.19 percent. What is the coupon rate?
N=6X2=12
PV=-991.38
FV=1000
YTM/2=I/Y=4.595
GET PMT=45
CR=45X2/1000=9%
 3.AB Builders, Inc. has 12-year bonds outstanding with a face value of $1,000 and a market price of $974.
The bonds pay interest annually and have a yield to maturity of 4.03 percent. What is the coupon rate?
N=12
FV=1000
PV=-974
YTM=I/Y=4.03%
GET PMT=37.52
CR=37.52/1000=0.0375X100%=3.75%

4. Best Western has $1,000 face value bonds outstanding. These bonds pay interest semiannually,
mature in six years, and have a 5 percent coupon. The current price is quoted at 101. What is the
yield to maturity?
N=6X2=12
FV=1000
PMT=1000X5%/2=25
PV=-1010
YTM=4.64X2=9.28%
5. The App Store needs to raise $2.2 million for an expansion project. The firm wants to raise this money by
selling zero coupon bonds with a par value of $1,000 that mature in 20 years. The market yield on similar bonds
is 8.8 percent. How many bonds must The App Store sell to raise the money it needs? (Assume semiannual
compounding.)

Number of bonds = $2,200,000/$178.64 = 12,315 bonds

6. RoadsideMarkets has 8.45 percent coupon bonds outstanding that mature in 10.5 years.
The bonds pay interest semiannually. What is the market price per bond if the face value is
$1,000 and the yield to maturity is 7.2 percent?

Explanation: Bond price = $42.25({1 − [1/(1 + .072/2)(10.5)(2)]}/(.072/2)) + $1,000/(1

+ .072/2)(10.5)(2)
Bond price = $1,091.00

7. Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market
price of $548. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is
paid annually. How many years is it until these bonds mature?
Explanation: $548 = $65{[1 − (1/1.132t)]/.132} + $1,000/1.132t

To solve for t, use the formula, a financial calculator, or a computer.

Enter: 13.2 −$548 $65 $1,000
N I/Y PV PMT FV
Solve for: 17.84

5. A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face
value of $1,000. What is the percentage change in the price of this bond if the
market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?
Explanation: Bond price = $30({1 − [1/(1 + .055/2)(13)(2)]}/(.055/2)) +
$1,000/(1 .055/2)(13)(2)
Bond price = $1,046.01

Bond price = $30({1 − [1/(1 + .057/2)(13)(2)]}/(.057/2)) + $1,000/(1 +.057/2)(13)(2)

Bond price = $1,027.28

% change in price = ($1,027.28 − 1,046.01)/$1,046.01

% change in price = −.0179, or −1.79%

6. Kaiser Industries has bonds on the market making annual payments, with 14 years
to maturity, a par value of $1,000, and a current price of $1,108.60. At this price,
the bonds yield 7.5 percent. What is the coupon rate?
Explanation: Bond price = $1,108.60 = C{[1 − (1/1.07514)]/.075} + $1,000/1.07514
C = $87.79

Coupon rate = $87.79/$1,000

Coupon rate = .0878, or 8.78%
11. A bond has a yield to maturity of 9.38 percent, a 7.5 percent annual coupon, a $1,000 face value, and
a maturity date 21 years from today. What is the current yield?

Current yield = $75/$830.07 = 9.04 percent

FIN4131 STOCK

1. Healthy Foods just paid its annual dividend of $1.45 a share. The firm recently
announced that all future dividends will be increased by 2.8 percent annually. What is
one share of this stock worth to you if you require a 14 percent rate of return?

P0 = ($1.45 × 1.028)/(0.14 - 0.028) = $13.31

2. Solar Energy, Inc. will pay an annual dividend of $1.85 next year. The company just
announced that future dividends will be increasing by 2 percent annually. How much
are you willing to pay for one share of this stock if you require a 14 percent return?

P0 = $1.85/(0.14 - 0.02) = $15.42

3. Braxton's Cleaning Company stock is selling for $32.60 a share based on a 14 percent
rate of return. What is the amount of the next annual dividend if the dividends are
increasing by 5 percent annually?

D = $32.60 × (0.14 - 0.05) = $2.93

4. Swan Lake Marina is expected to pay an annual dividend of $1.58 next year. The
stock is selling for $18.53 a share and has a total return of 12 percent. What is the
dividend growth rate?

g = 0.12 - ($1.58/$18.53) = 3.47 percent

5. Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past
15 years. Yesterday, the firm announced the dividend will increase next year by 10
percent and will stay at the level through year 3, after which time the dividends will
increase by 2 percent annually. The required return on this stock is 12 percent. What is
the current value per share?

P3 = ($2.40 × 1.10 × 1.02)/(0.12 - 0.02) = $26.928

P0 = {($2.40 × 1.10)/1.12} + {($2.40 × 1.1)/1.122} + {[($2.40 × 1.1) +
$26.928]/1.123} = $25.51

6. Business Solutions, Inc. is expected to pay its first annual dividend of $1.00 per share
three years from now. Starting in year 6, the company is expected to start increasing
the dividend by 2 percent per year. What is the value of this stock today at a required
return of 12 percent?
 P5 = ($1.00 × 1.02)/(0.12 - 0.02) = $10.20; P0 = [$1.00/1.123] + [$1.00/1.124] +
[($1.00 + $10.20)/1.125] = $7.70

7. K's Fashions is growing quickly. Dividends are expected to increase by 8 percent

annually for the next three years, with the growth rate falling off to a constant 3
percent thereafter. The required return is 14 percent and the company just paid its
annual dividend of $3.64 per share. What is the current share price?

Explanation: P3 = [$3.64(1.083)(1.03)]/(.14 − .03)

P3 = $42.94

P0 = [$3.64(1.08)/(.14 − .08)][1 − (1.08/1.14)3] + $42.94/1.143

P0 = $38.79

8. Farmco just paid its annual dividend of $.32 per share. The dividends are expected to
grow at 25 percent annually for the next 4 years and then level off to an annual
growth rate of 3 percent indefinitely. What is the price of this stock today given a
required return of 15 percent?

Explanation: P4 = [$.32(1.25)4(1.03)]/(.15 − .03)

P4 = $6.71

P0 = [$.32(1.25)/(.15 − .25)][1 −(1.25/1.15)4] + $6.71/1.154

P0 = $5.42

9. Shore Hotels just paid an annual dividend of $1.50 per share. The company will
increase its dividend by 7 percent next year and will then reduce its dividend growth
rate by 2 percentage points per year until it reaches the industry average of 3 percent
dividend growth, after which the company will keep a constant growth rate forever.
What is the price of this stock today given a required return of 14 percent?

Explanation: P2 = [$1.50(1.07)(1.05)(1.03)]/(.14 − .03)

P2 = $15.78
P0 = [$1.50(1.07)]/1.14 + {[$1.50(1.07)(1.05)] + $15.78}/1.142
P0 = $14.85
10. HCC, Inc., expects its dividends to grow at 25 percent per year for the next seven
years before levelling off to a constant 3 percent growth rate. The required return is 11
percent. What is the current stock price if the annual dividend per share that was just
paid was $1.05?

Explanation: P7 = [$1.05(1.25)7(1.03)]/(.11 − .03)

P7 = $64.46
P0 = [$1.05 (1.25)/(.11 − .25)][1 − (1.25/1.11)7] + $64.46/1.117
P0 = $43.21