1. KMart currently has a bond for 10 million dollars that they need to pay off in seven years. The coupon rate is 5.25%. They are setting up a sinking fund to help pay it off; if the sinking fund can earn 6.1% compounded semi-annually, What semi-annual payments do they need to make? What is their annual cost of debt? What is the book value of debt after 4years?

2. Kely purchased a $5000 bond with a coupon rate of 6.5% and a maturity date of June 1, 2020. As of June 1, 2012, prevailing interest rates dropped to 6%. What was the bond’s price on June 1, 2012?

3. There is a stock, which does not pay anything for 6 years. Afterward, it distributes a dividend of $2 per year for 5 years. In the 6th year, the dividend starts rising 4% perpetually. the cost of equity is 12 % Derive the stock price.