Question

**Olympic Corp sold an issue of bonds with a 15-year
maturity, a $1,000 face value, and a 10% coupon rate with interest
being paid semiannually. The market rate of interest when the bonds
were issued was 10%. Two years after the bonds were issued, the
market rate rose to 13%. The most recent common-stock dividend for
Olympic Corp was $3.45 per share. Due to its stable sales and
earnings, the firm’s management predicts dividends will remain at
the current level for the foreseeable future.**

**REPLY POST: Question 1**

**Assume instead two years after the bonds were issued,
the market rate fell to 8%.**

**1) Are these bonds a premium or a discount
bond?**

**2) Calculate the selling price for the bonds at the
following time periods: 1) Two years after issue (assuming
semiannual interest) 2) Five years after issue (assuming annual
interest)**

**3) Suppose the bond described above in the primary post
(part 3/question 2) with annual interest are priced at $895.50, 5
years after issue. Should Olympic Corp purchase the bond? What is
the maximum price they should pay for that bond?**

**4) What is the value of the common stock for Olympic
Corp if the required return increases to 10%?**

Answer #1

1) The bonds were issued originally at par since the coupon rate was equal to the market rate then.

2)

3) Question 2 is not given, hence will not be able to answer this part.

4) Stock price = Dividend / Required return = 3.45/ 10% = 34.5

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Olympic Corp was $3.45 per share. Due to its stable sales and
earnings, the firm’s management predicts dividends will remain at
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