# Preferred Stock and Maturity Calculations

1. Bavarian Sausage, Inc. has preferred stock outstanding. This stock pays a semiannual dividend of $1.25. If the next dividend is paid six months from now and the annual required return is 10%, what should be the value of the preferred stock?

Answer $25

2. A 15-year, 8%, $1000 face value bond is currently trading at $958. The yield to maturity of this bond must be.

Answer greater than 8%

Please explain how to get the answer in the simplest form.

3. Bavarian Sausage just issued a 10 year 7% coupon bond. The face value of the bond is $1,000 and the bond makes annual coupon payments. If the required return on the bond is 10%, what is the bond's price?

Answer $815.66

4. Bavarian Sausage just issued a 10-year 12% coupon bond. The face value of the bond is $1,000 and the bond makes annual coupon payments. If the bond is trading at $967.25, what is the bond's yield to maturity?

Answer 12.59%

Please explain how to get the answer in the simplest form.

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#### Solution Preview

1. Bavarian Sausage, Inc. has preferred stock outstanding. This stock pays a semiannual dividend of $1.25. If the next dividend is paid six months from now and the annual required return is 10%, what should be the value of the preferred stock?

Answer $25

Let the price be x

annual required return = 10% , so semi annual return required = 10% /2 =5%

so we have 5% x = $1.25

x = 1.25/5%

x = $25

2. A 15-year, 8%, $1000 face value bond is currently trading at $958. The yield to maturity ...

#### Solution Summary

This solution shows step-by-step calculations to determine the value of the preferred stock and bond yield to maturity in different scenarios .

Bonds/Percents/Stocks

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%

Inflation premium............. 5

Risk premium................. 4

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.