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problem1) Assume a $1000 face value bond has a coupon rate of 8.5 percent, pays interest semi-annually, and has an eight-year life. If investors are willing to accept a 10.25 percent rate of return on bonds of similar quality, what is the present value or worth of this bond?

problem2) Garcia Company’s bonds have the face value of $1000, will mature in ten years, and carry a coupon rate of 16 percent. Suppose interest rates are made semi-annually.

a) find out the present value of the bonds cash flows if required rate of return is 16.64 percent.

b) How will your answer change if required rate of return is 12.36 percent?

problem3) Mercier Corporations stock is selling for $95. It has just paid the dividend of $5 a share. Expected growth rate in dividends is 8 percent.

a) What is the required rate of return on this stock?

b) Using your answer to (a), assume Mercier announces developments occur which must lead to dividend increases of 10 percent annually. What would be the value of Mercier’s stock?

c) Again using your answer to (a), assume developments occur which leave investors expecting that dividends will not change from their current levels in the foreseeable future. Now what would be the value of Mercier stock?

d) From your answers to (b) and (c), how important are investors expectation of future dividend growth to the present stock price?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M9655

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