Question

**2**. A 7% semiannual coupon bond matures in 8
years. The bond has a face value of $1,000 and is currently trading
at $1,104. Calculate the bond’s YTM.

**3.** Four years earlier, Janice purchased a
$1,000 face value corporate bond with a 6% annual coupon, and
maturing in 10 years. At the time of the purchase, it had an
expected yield to maturity of 8.76%. If Janice sold the bond today
for $1,088.39, what rate of return would she have earned for the
last four years?

**4.** Markel Mining company’s ore reserves are
being depleted, so its sales are falling. Also, because its pit is
getting deeper each year, its cost are rising. As a result, the
company’s earnings and dividends are declining at the constant rate
of 4.5% per year. If D_{0} = $6.25 and r_{s} = 12%,
what is the value of Markel Mining’s stocks?

**5**. You are considering an investment in
Progressive stock, which is expected to pay a dividend of $3.00 a
share at the end of the year (D_{1} = $3.50) and has a beta
of 0.9. The risk-free rate is 4.25% and the market risk premium is
6.5%. The company's stock currently sells for $40.00 a share, and
its dividend is expected to grow at a constant rate g. Assuming the
market is in equilibrium, what does the market believe will be the
stock price at the end of 3 years. (That is, what is
P_{3}?)

**6**. NXP Semiconductors is expanding rapidly and
currently needs to retain all of its earnings; hence, it does not
pay dividends. However, investors expect NXP to start paying
dividends, beginning with a dividend of $1.00 coming 3 years from
today. The dividends should grow rapidly ------ at a rate of 50%
per year ----- during year 4 and 5; but after year 5, growth should
be a constant 8% per year. If the required return on NXP is 13%,
what is the value of the stock today?

**7.** AE Product's stock price is $58.88, and it
recently paid a $2.00 dividend. This dividend is expected to grow
by 25% for the next 3 years, then grow forever at a constant rate,
g; and r_{s}= 12%. At what constant rate is the stock
expected to grow after year 3?

**8**. The Brady Company’s currently outstanding 9%
coupon bonds have a yield to maturity of 12%. Brady believes it
could issue new 5-year par-value bonds with same YTM and it will
pay a 6% fee for issuing the bond (6% of issuing price). If
company's marginal tax rate is 20%, what is company's after tax
cost of debt?

**9.** Greenwell Company’s EPS was $7.10 in 1999
and $4.20 in 1994.The company pays out 40% of its earnings as
dividends, and the stock sells for $44.

1) Calculate the past growth earnings,

2) What is next expected dividends per share, D_{1}.
(D_{0} = 0.40($7.10) = $2.84). Assume that the past growth
rate will continue.

3) What is the cost of retained earnings, r_{r}, for
Greenwell Company?

**10**.On January 1, 2019, the total assets of the
McGarvey Company were $270 million. The first present capital
structure, which follows, is considered optimal. Assume that they
have no short-term debt.

Long-term debt $135,000,000

Common
Equity
135,000,000

_____________

Total Liabilities and Equity $270,000,000

New bonds will have a 10% coupon rate and will be sold at par.
Common stocks are currently selling at $60 a share, can be sold to
net the company $54 a share. Stockholders required rate of return
is estimated to be 12%, consisting of a dividend yield of 4% and an
expected growth rate of 8% (the next expected dividend is $2.4 so
$2.4/$60 = 4%). Retained earnings are estimated to be $15 million.
The marginal corporate tax rate is 20%. Assuming that all asset
expansion (Gross expenditure plus fixed assets plus related working
capital) is included in the capital budget, the amount of the
capital budget, ignoring depreciation, is 160,000,000

- To maintain the present capital structure, how much capital budget must McGarvey finance by equity?
- How much of the new equity funds needed will be generated internally and externally?
- Calculate the cost of each of the equity components.
- Calculate WACC.

Answer #1

Answer to Question 1:

Face Value = $1,000

Current Price = $1,104

Annual Coupon Rate = 7.00%

Semiannual Coupon Rate = 3.50%

Semiannual Coupon = 3.50% * $1,000

Semiannual Coupon = $35

Time to Maturity = 8 years

Semiannual Period to Maturity = 16

Let Semiannual YTM be i%

$1,104 = $35 * PVIFA(i%, 16) + $1,000 * PVIF(i%, 16)

Using financial calculator:

N = 16

PV = -1104

PMT = 35

FV = 1000

I = 2.69%

Semiannual YTM = 2.69%

Annual YTM = 2 * 2.69%

Annual YTM = 5.38%

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