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 D₀ = $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 (D₁ = $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 P₃?)

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, D₁. (D₀ = 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

1. To maintain the present capital structure, how much capital budget must McGarvey finance by equity?
2. How much of the new equity funds needed will be generated internally and externally?
3. Calculate the cost of each of the equity components.
4. 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%