Fin 571- Week Two Problems

 Essay regarding Fin 571- Week Two Problems

Individual Textual content Problem Models - Week Two

CHAPTER 5

A2. (Bond valuation) A $1, 000 confront value bond has a staying maturity of 10 years and a essential return of 9%. The bond's voucher rate is definitely 7. 4%. What is the fair value of this bond?

" The cost of a connection, its fair price, is the present benefit of it is promised upcoming payments for coupon and principal. ” So our company is solving to get PV

FV= $1, 1000

N= 10

I= 9%

Pmt sama dengan 7. 4% of $1, 000 sama dengan $74

|Future Value |$1, 000

|Years |10

|Rate |9%

|PMT |$74

|Present Value |($897. 32)| INCORRECT Correct answer PV sama dengan -$895. 94

A10. (Dividend discount model) Assume RHM is anticipated to pay an overall total cash gross of $5. 60 the coming year and its dividends are expected to grow for a price of 6% per year forever. Assuming gross annual dividend obligations, what is the present market value of a share of RHM inventory if the needed return about RHM prevalent stock can be 10%?

Reasonable price sama dengan starting dividend/ (required return - progress rate)

Fair price sama dengan $5. 60/(10%-6%) = $5. 60/4% = $5. 60/0. 04 = $140

A12. (Required come back for a desired stock) David River $3. 38 recommended is offering for $45. 25. The preferred dividend can be nongrowing. Precisely what is the required returning on Wayne River preferred stock?

Benefit of share = dividend / yield rate

Value of stock 5. return rate = dividend

Return rate = dividend / benefit of stock = $3. 38/$45. 25= 0. 075 = 7. 5%

B16. (Interest-rate risk) Philadelphia Electric has many a genuine trading on the New York Stock Exchange. Presume PhilEl's you possess have similar coupon costs of 9. 125% although that one concern matures in 1 year, one out of 7 years, and the third in 15 years. Assume that a coupon payment was made recently.

a. In case the yield to maturity for all those three a genuine is 8%, what is the fair value of each connect?

|Future Benefit |$1, 1000 |$1, 500 |$1, 000

|Years |1 |7 |15

|Rate |8% |8% |8%

|PMT |$91. twenty-five |$91. 25 |$91. twenty-five

|Present Value |($1, 010. 42) |($1, 058. 57) |($1, 096. 29)

b. Suppose that the yield to maturity for every these a genuine changed immediately to 7%.

What is the fair selling price of each connect now?

|Future Value |$1, 000 |$1, 000 |$1, 000

|Years |1 |7 |15

|Rate |7% |7% |7%

|PMT |$91. 25 |$91. 25 |$91. 25

|Present Value |($1, 019. 86) |($1, 114. 52) |($1, 193. 54)

c. Suppose that the deliver to maturity for all of these kinds of bonds transformed instantaneously again, this time to 9%. So what now is the fair price of each and every bond?

|Future Value |$1, 000 |$1, 000 |$1, 000

|Years |1 |7 |15

|Rate |9% |9% |9%

|PMT |$91. 25 |$91. 25 |$91. 25

|Present Value |($1, 001. 15) |($1, 006. 29) |($1, 010. 08)

d. Based on the reasonable prices at the various yields to maturity, is interest-rate risk similar, higher, or perhaps lower for longer- compared to shorter-maturity you possess?

Interest rate risk is larger for longer term bonds, because the risk coverage is for a longer time.

B20. (Constant growth model) Medtrans is actually a profitable company that is not spending a dividend on its common stock. James...