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Financial Decision Makers for Managers - Stocks, Bonds, and

Complete the following problems related to Chapter 5 (Bonds, Stocks, Dividends)

5-1. The Altoona Company issued a 25-year bond 5 years ago with a face value of $1,000. The bond pays interest semiannually at a 10% annual rate.
a. What is the bond's price today if the interest rate on comparable new issues is 12%?
b. What is the price today if the interest rate is 8%?
c. What is the price today if the interest rate is 10%?
d. Calculate the current yields for parts a, b, and d.
e. Explain the results of parts a and b in terms of opportunities available to investors.

6-6 The Pancake Corporation recently paid a $3 dividend, and is expected to grow at 5% forever. Investors generally require an expected return of at least 9% before they'll buy stocks similar to Pancake.
a. What is Pancake's intrinsic value?
b. Is it a bargain if it's selling at $76 a share?

Solution Preview

Complete the following problems related to Chapter 5 (Bonds, Stocks, Dividends)

5-1. The Altoona Company issued a 25-year bond 5 years ago with a face value of $1,000. The bond pays interest semiannually at a 10% annual rate.
a. What is the bond's price today if the interest rate on comparable new issues is 12%?
b. What is the price today if the interest rate is 8%?
c. What is the price today if the interest rate is 10%?
d. Calculate the current yields for parts a, b, and d.
e. Explain the results of parts a and b in terms of opportunities available to investors.

We need to calculate how much the bonds have been issued by using the formula as follows: -

where B is the issued price
C is the coupon payment
r is the current interest rate
n is the ...

Solution Summary

This solution is comprised of a detailed explanation to calculate bond price and stock intrinsic value.

$2.19