Question 1 (Bond valuation) you own a 10 year, $1,000 par value bond paying 7.5 percent interest annually. The market price of the bond is $950, and your required rate of return is 10 percent.

a.       Compute the bonds expected rate of return.

b.      Determine the value of the bond to you, given your required rate of return.

c.       Should you sell the bond or continue to own it?

Question 2 (Bond valuation) National Steel 20 year, $1,000 par value bonds pay 9 percent interest annually. The market price of the bonds is $800, and your required rate of return is 13 percent.

a.       Compute the bonds expected rate of return.

b.      Determine the value of the bond to you, given your required rate of return.

c.       Should you purchase the bond?

Question 3 (Bondholders’ expected rate of return) The market price is $1,000 for a 16 year bond (1,000 par value) that pays 9 percent interest (4.5 percent semiannually) What is the bond’s expected rate of return?

Question 4 (Expected rate of return and current yield) Citigroup issued bonds that pay a coupon interest rate of 8.5 percent. The bonds mature in 14 years. They are selling for $866. What would be your expected rate of return (yield to maturity) if you bought the bonds? What would the current yield be?

Question 5 (Yield to maturity) A 13 year bond for Katy Corporation has a market price of $ 750 and a par value of $1,000. If the bond has an annual interest rate of 11 percent, but pays interest semiannually. What is the bond yield to maturity?

Question 6 (Preferred stock value) what is the value of a preferred stock when the dividend rate is 13 percent on a $125 par value? The appropriate discount rate for a stock of this risk level is 10 percent.

Question 7 (Common stock valuation) Dalton Inc. has a return on equity of 10.7 percent and retains 52 percent of its earnings for reinvestment purposes. It recently paid a dividend of $2.75 and the stock is currently selling for $38.

a.       What is the growth rate for Dalton Inc?

b.      What is the expected return for Dalton’s stock?

c.       If you require a 14 percent return, should you invest in the firm?

Question 8 (Measuring growth) Given that a firm’s return on equity is 19 percent and management plans to retain 42 percent of earning for investment purposes, What will be the firm’s growth rate?

Question 9 (Preferred stockholder expected return) You own 150 shares of Dalton Resources preferred stock, which currently sells for $41.84 per share and pays annual  dividends of $3.50 per share?

Question 10 (Common stockholder expected return) Blackburn & Smith common stock currently sells for $ 24.50 per share. The company’s executives anticipate a constant growth rate of 8.5 percent and end of year dividend of $1.75.

What is your expected rate of return?

If you require a return of 19 percent, should you purchase the stock?