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Bond Valuation, Dividend Discount Model, Required Return, CAPM

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A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a
required return of 9%. The bond's coupon rate is 7.4%. What is the fair value of this bond?

A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60
next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming
annual dividend payments, what is the current market value of a share of RHM stock if the
required return on RHM common stock is 10%?

A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The
preferred dividend is non-growing. What is the required return on James River preferred stock?

A14. (Stock valuation) Suppose Toyota has non-maturing (perpetual) preferred stock outstanding
that pays a $1.00 quarterly dividend and has a required return of 12% APR (3% per quarter).
What is the stock worth?

B3. (CAPM) The required return on an asset with a beta of 1.4 is 17% and the riskless return
is 7%. What is the expected return on the market portfolio?

B9. (CAPM) Stock A has a beta of 2.0 and a required return of 15%. The market return is
10%. What will be the required return on stock B, which has a beta of 1.4?

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Solution Summary

The solution determines the bond valuation, dividend discount model, required return, stock valuation, and CAPM in the given questions.

$2.19