Question

1. HMK Enterprises would like to raise $10 million to invest in capital expenditures. The company plans to issue five-year bonds with a face value of $1000 and a coupon rate of 6.5% (annual payments). The following table summarizes the yield to maturity for five-year (annual pay) coupon corporate bonds of various ratings.

Rating	AAA	AA	A	BBB	BB
YTM	6.20%	6.30%	6.50%	6.90%	7.50%

a. Assuming the bonds will be rated AA, what will the price of the bonds be?

b. What must the rating of the bonds be for them to sell at par?

2. Gugenheim, Inc. offers a 7 percent coupon bond with semi-annual payments. The yield to maturity is 5.85 percent and the maturity date is 9 years. What is the market price of a $1,000 face value bond?

3. Suppose you expect Longs Drug Stores to pay an annual dividend of $0.56 per share in the coming year and to trade for $45.50 per share at the end of the year. If investments with equivalent risk to Longs’ stock have an expected return of 6.80%, what is the most you would pay today for Longs’ stock?

4. Bilkins Mfg. made two announcements concerning its common stock today. First, its next annual dividend has been set at $2.16 a share. Second, all future dividends will increase by 4 percent annually. What is the maximum amount you should pay to purchase a share of Bilkin’s stock if your goal is to earn a 10 percent rate of return?

5. Rasmussin Corporation currently pays a dividend of $0.50 per quarter, and it will continue to pay this dividend forever. What is the price per share of NoGrowth stock if the firm’s equity cost of capital is 15%?

Answer 1

1.a)	The price of the bonds = 1000/1.063^5+65*(1.063^5-1)/(0.063*1.063^5) =	$    1,008.36
b)	If the bonds have to sell at par, the coupon rate should be equal to the YTM. So the YTM should be 6.5% for which the rating should be 'A'.
2.	The price of the bonds = 1000/1.02925^18+35*(1.02925^18-1)/(0.02925*1.02925^5) =	$    1,299.86
3.	The most that can be paid is the PV of the expected dividend+PV of the year end price = (0.56+45.50)/1.068 =	$          43.13
4.	Using the constant dividend growth model, the maximum price that can be paid for the stock = 2.16/(0.10-0.04) =	$          36.00
5.	The price of the stock = 0.50/(0.15/4) =	$          13.33