1) Twin Oaks Health Center has a bond issue outstanding with a coupon rate of 7 percent and four years remaining until maturity. The par value of the bond is $1,000, and the bond pays interest annually.
A.) Determine the current value of the bond if present market conditions justify a 14 percent required rate of return.
B.) Now, suppose Twin Oaks' four-year bond had semiannual coupon payments. What would be its current value? (Assume a 7 percent semiannual required rate of return. However, the actual rate would be less than 7 percent because a semiannual coupon bond is slightly less risky than an annual bond.)
C.) Assume that Twin Oaks' bond had a semiannual coupon but 20 years remaining to maturity. What is the current value under these conditions? (Again, assume a 7 percent annual rate of return, although the actual rate of would probably be greater than 7 percent because of increased price risk.)
2) Pacific Homecare has three bond issues outstanding. All three bonds pay $100 in annual interest plus $1,000 at maturity. Bond S has a maturity of five years, Bond M has a 15-year maturity, and bond L matures in 30 years.
A.) What is the value of each of these bonds when the required interest rate is 5 percent, 10 percent, and 15 percent?
B.) Why is the price of Bond L more sensitive to interest rate changes than the price of Bond S?
3) Assume the risk-free rate is 6 percent and the market risk premium is 6 percent. The stock of Physicians Care Network (PCN) has a beta of 1.5. The last dividend paid by PCN (D(0)) was a $2 per share.
A.) What would PCN's stock value be if the dividend was expected to grow at a constant:
. -5 percent?
. 0 percent?
. 5 percent?
. 10 percent?
B.) What would be the stock value if the growth rate is 10 percent, but PCN's beta falls to
. 1.0?
. 0.5?
4) California Clinics, an investor-owned chain of ambulatory care clinics, just paid a dividend of $2 per share. The firm's dividend is expected to grow at a constant of 5 percent per year, and investors require a 15 percent rate of return on the stock.
A.) What is the stock's value?
B.) Suppose the riskiness of the stock decreases, which causes the required rate of return to fall to 13 percent. Under these conditions, what is the stock's value?
C.) Return to the original 15 percent required rate of return. Assume that the dividend growth rate estimate is increased to a constant 7 percent per year. What is the stock's value?