Assignment

1. A $1,000 face value bond of Acme Inc. pays an annual coupon and carries a coupon rate of 5.25%. It is was a 30 year bond when issued and it has 13 years remaining to maturity. If it currently has a yield to maturity of 4.75%.

(a) What interest payments do bondholders receive each year?
(b) What is the current bond price?
(c) What is the bond price if the yield to maturity rises to 6.75%?

2. A 10 year maturity bond with a coupon rate of 6.75% and face value of $1,000 makes semi-annual coupon payments. What is the bond's yield to maturity if the bond is selling for:

(a) 900?
(b) 1,000?
(c) 1,100?

3. Large Industries annual bonds are selling at 105.70 (i.e., the price is $1,057 for the $1,000 bond). There are 3 years remaining until maturity on the bonds and the yield to maturity is 6.25%. Find the coupon rate. (Note: you may have to use a trial and error solution method)

4. Below are the data for two stocks, both of which have a discount rate of 9 percent:

                                              Stock A       Stock B
Return on equity                        11%            10%
Earnings per share (time 1)        $3.20           $1.70
Dividends per share (time 1)       $1.55           $.50

a. What are the dividend payout ratios for each firm?
b. What are the expected dividend growth rates for each firm?
c. What is the estimated stock price for each firm?
d. Which stock has the higher market value of equity?

5. You have forecast that United Sports, Inc. will pay a dividend of $1.60 next year (in time 1), $2.50 two years from now (in time 2) and $3.00 three years from now (in time 3). For dividends beyond three years, you assume they will increase at 5% per year from the prior year. If the discount rate is 9%, calculate a fair price for the stock of United Sports, Inc.