Problems are to be worked in order. Remember to show any assumptions that you used. All work is to be completed individually. You can use Excel, a financial calculator or solve the problems by hand.
1. Starbucks has one debt issue outstanding. Debt matures on August 15, 2017, and has a 6.25% coupon. Coupons are paid semi annually. Bond is priced to yield 1.61% compound semi annually. Estimate price of the bond on February 15, 2013, immediately after that coupon is paid.
2. You buy a SML Bond for $980. Bond has a face value of $1000 and an annual coupon rate of 8%. There are 5 years left until maturity.
a. Find the yield to maturity on the bond?
b. At the end of two years, price has risen to $1050. What is the yield to maturity based on new price?
c. As of a special delivery by the stork, you decide to sell bond at the end of year 2 for $1050. What was your return? Why does this vary from the yield to maturity? Suppose you do get the first two coupon payments.
3. You have following information for Starbucks: Current EPS is $1.79. The present dividend is $.68 per share. The return on equity is 24%. The present price is $49.22.
a. Use dividend discount model (also known as constant growth model) to compute the return for Starbucks.
b. Suppose your answer to part a. is correct, compute the present value of the growth opportunities (PVGO).
4. Tank Industries Washers expects to pay following dividends over the next 4 years: $2.50, $3.20, $4.75 and $5.20 respectively (starting at time 1).
a. After year 4, the firm expects a constant growth rate of 3%. If investors need 11%, what is the present share price?
b. The CEO, Major Payne, has identified numerous new investment opportunities. He is trying to convince investors to back his strategy. He will require to keep the dividends at $2.50 each year for the next four years. After year 4, the growth rate will be 10% forever. Based on increased risk, the other investors increase the required return to 15%. Should they back his strategy? Hint: Re-estimate the present price based on the new cash flows.
5. BAC is considering an issue of preferred stock. The dividends are 8.12% of the $25 par value.
a. If the present price is $26.25 per share, find the return on the preferred stock?
b. Assume the preferred stock would mature in 20 years. If price is $26.25 per share, what is the return on the preferred stock? HINT: This is just like a bond, but face value is 25. For a problem, you could suppose dividends are annual.