1. Starbucks has one debt issue outstanding. The debt matures on August 15, 2017, and has a 6.25% coupon. Coupons are paid semiannually. The bond is priced to yield 1.61% compound semiannually. Estimate the price of the bond on February 15, 2013, immediately after that coupon is paid.
2. You buy a SML Bond for $980. The bond has a face value of $1000 and an annual coupon rate of 8%. There are 5 years left until maturity.
a. What is the yield to maturity on the bond?
b. At the end of two years, the price has risen to $1050. What is the yield to maturity based on the new price?
c. Because of a special delivery by the stork, you decide to sell the bond at the end of year 2 for $1050. What was your return? Why does this differ from the yield to maturity? Assume you do get the first two coupon payments.
3. You have the following information for Starbucks: Current EPS is $1.79. The current dividend is $.68 per share. The return on equity is 24%. The current price is $49.22.
a. Use the dividend discount model (also known as the constant growth model) to estimate the return for Starbucks.
b. Assuming your answer to part a. is correct, estimate the present value of the growth opportunities (PVGO).
4. Tank Industries Washers expects to pay the 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 require 11%, what is the current share price?
b. The CEO, Major Payne, has identified several new investment opportunities. He is trying to convince investors to back his strategy. He would need to keep the dividends at $2.50 each year for the next four years. After year 4, the growth rate would be 10% forever. Based on the increased risk, the other investors increase the required return to 15%. Should they back his strategy? Hint: Re-estimate the current 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 current price is $26.25 per share, what is the return on the preferred stock?
b. Suppose the preferred stock will mature in 20 years. If the price is $26.25 per share, what is the return on the preferred stock? HINT: This is just like a bond, but the face value is 25. For the problem, you can assume the dividends are annual.