Question

3.) The real risk-free rate is 2%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 5.6%. What is the maturity risk premium for the 2-year security? Round your answer to one decimal place.

4.) Renfro Rentals has issued bonds that have an 8% coupon rate, payable semiannually. The bonds mature in 10 years, have a face value of $1,000, and a yield to maturity of 7.5%. What is the price of the bonds? Round your answer to the nearest cent.

5.) You just purchased a bond that matures in 15 years. The bond has a face value of $1,000 and an 8% annual coupon. The bond has a current yield of 8.37%. What is the bond's yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

6.) Boehm Incorporated is expected to pay a $1.90 per share dividend at the end of this year (i.e., D1 = $1.90). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 12%. What is the estimated value per share of Boehm's stock? Do not round intermediate calculations. Round your answer to the nearest cent.

7.) Nick's Enchiladas has preferred stock outstanding that pays a dividend of $4 at the end of each year. The preferred sells for $60 a share. What is the stock's required rate of return (assume the market is in equilibrium with the required return equal to the expected return)? Round the answer to two decimal places.

8.) A company currently pays a dividend of $1 per share (D0 = $1). It is estimated that the company's dividend will grow at a rate of 16% per year for the next 2 years, and then at a constant rate of 6% thereafter. The company's stock has a beta of 1.2, the risk-free rate is 8.5%, and the market risk premium is 5.5%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.

9.) You buy a share of The Ludwig Corporation stock for $18.90. You expect it to pay dividends of $1.04, $1.0920, and $1.1466 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $21.88 at the end of 3 years.

A - Calculate the growth rate in dividends. Round your answer to two decimal places.%

B - Calculate the expected dividend yield. Round your answer to two decimal places.%

C - Assuming that the calculated growth rate is expected to continue, you can add the dividend yield to the expected growth rate to obtain the expected total rate of return. What is this stock's expected total rate of return (assume market is in equilibrium with the required rate of return equal to the expected return)? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

3]

Yield of Treasury security = real risk free rate + inflation premium + maturity risk premium

5.6% = 2% + 3% + maturity risk premium

maturity risk premium = 0.6%

4]

Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Price of bond is calculated using PV function in Excel :

rate = 7.5%/2 (Semiannual YTM of bonds = annual YTM / 2)

nper = 10 * 2 (10 years remaining until maturity with 2 semiannual coupon payments each year)

pmt = 1000 * 8% / 2 (semiannual coupon payment = face value * coupon rate / 2)

fv = 1000 (face value receivable on maturity)

PV is calculated to be $1,034.74