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# The preferred stock of Ultra Corporation pays an annual dividend of \$6.30. It has a required rate of return of 9 percent. Compute the price of the preferred stock.

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Midland Oil has \$1,000 par value bonds outstanding at 11 percent interest. The bonds will
mature in 25 years. Compute the current price of the bonds if the present yield to maturity
is:
a) 6 percent
b) 8 percent
c) 12 percent

Harrison Ford Aoto Company has a \$1,000 par value bond outstanding that pays 11 percent
interest. The current yield to maturity on each bond in the market is 8 percent. Compute the
price of these bonds for these maturity dates:
a) 30 years
b) 15 years
c) 1 year

Tom Cruise Lines, Inc. issued bonds five years ago at \$1,000 per bond. These bonds had a
25-year life when issued and the annual interest payment was then 12 percent. This return
was in line with the required returns by bondholders at that point described below:

Real rate of return............ 3%
Total Return............... 12%
Assume that 5 years later the inflation premium is only 3 percent and is appropriately reflected
in the required return (or yield to maturity) of the bonds. Compute the new price of the bond.

The preferred stock of Ultra Corporation pays an annual dividend of \$6.30. It has a required
rate of return of 9 percent. Compute the price of the preferred stock.

#### Solution Preview

Hello!
The general formula for the price of a stock is (assuming that the first interest payment happens one year from now):

Price = C1/(1+r) + C2/(1+r)^2 + C3/(1+r)^3 + ... + Cn/(1+r)^n + F/(1+r)^n
[the symbol ^ means "to the power of"]

where

C1, C2, ... = annual payments of the bond
r = Yield to Maturity
n = number of years until maturity
F = face value of the bond

This formula will be useful for many of your questions:

Question 1
In this case, we have that the face value of the bond is \$1,000 (F = 1000). Also, we know that there are 25 years until maturity, so n=25. Finally, this bond pays 11% of the face value per year, therefore, C1 = C2 = C3 = ... = Cn = 110.

Part A
We're told that the yield to maturity is 6 percent. Therefore r = 0.06. So, now that we have all the parameters, we simply apply the bond pricing formula to find the value of this bond:

Price = ...

#### Solution Summary

Formula given and explained; computation done by hand

\$2.19