Question

Show all workings Please

1 Samuel Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a
par value of $1,000. The going interest rate (rd) is 6.20%, based on semiannual
compounding. What is the bond’s price?

2 Calculate the required rate of return for Tolu Inc., assuming that (1) investors expect a
4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk
premium is 5.0%, (4) the firm has a beta of 1.00, and (5) its realized rate of return has
averaged 15.0% over the last 5 years.

3 If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock’s expected
total return for the coming year?

4 Mustapha Datti Co. expects to earn $3.50 per share during the current year, its expected
dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its
common stock currently sells for $32.50 per share. New stock can be sold to the public at
the current price, but a flotation cost of 5% would be incurred. What would be the cost of
equity from new common stock?

5 Mustapha Datti Co. expects to earn $3.50 per share during the current year, its expected
dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its
common stock currently sells for $32.50 per share. New stock can be sold to the public at
the current price, but a flotation cost of 5% would be incurred. What would be the cost of
equity from new common stock?

Answer 1

Answer 1

As it's a semi-annual coupon paying bond, we will make the following changes

Maturity (no. of coupons paid) = 15 * 2 = 30

Coupon = 36.25 (1000 * 7.25% * .5)

Future value = 1000

Interest rate = 3.1 % (6.2%/2)

PV = 36.25/(1+3.1%)^1 + 36.25/(1+3.1%)^2 + 36.25/(1+3.1%)^3...............(36.25 + 1000)/(1+3.1%)^30

= 1101.58

In the last, we will pay a coupon plus the principal amount, so we take 36.25 + 1000.

Answer 2

Required return = Risk-free rate + Inflation + beta(market risk premium)

= 4 + 3 + 1*5

= 12%

Answer 3

Formula to calculate expected return

P0 = D1/(r-g)

44 = 1.25/(r-.055)

r = 8.34%