Question

1. O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 20 years. Their nominal yield to maturity is 8.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

2. Mature Conglomerate Corporation (MCC) just paid a dividend of $1.49 per share, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.25, the required return on the market is 12.50%, and the risk-free rate is 4.00%. What is the intrinsic value for MCC’s stock? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

3. Restful RVs Inc. (RRV) is presently enjoying relatively high growth because of a surge in the demand for recreational vehicles. Management expects earnings and dividends to grow at a rate of 35% for the next 4 years, after which high gas prices will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company’s last paid dividend, D0, was $2.25. RRV’s beta is 1.50, the market risk premium is 4.50%, and the risk-free rate is 3.00%. What is the intrinsic value of RRV’s common stock? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

1.

Given,

Par value = $1000

Maturity = 20 years

Yield to maturity = 8.25% or 0.0825

Bond price = $850

Solution :-

Semi annual yield to maturity (r) = 0.0825 x 6/12 = 0.04125

Semi annual periods (n) = 20 years x 2 = 40

Let semi annual coupon payment be 'C'