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Preferred Stock and Maturity Calculations

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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 .

$2.19
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