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    Valuing bond and common stocks

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    1.Baron Inc. bonds have a face value of $1000 and mature in 10 years. The coupon rate is 18%, and coupons are paid semiannually. The yield is 12% compound semiannually. Find the bond's price.

    2. Danish Inc. has cumulative preferred stock that pays an annual dividend of $4.50. If the current price is $37.50, what is the required return?

    3. Alpo expects to pay dividends of $3.54 at the end of year 1, $4.18 at the end of year 2, and $4.93 at the end of year 3. After year 3, dividends are expected to grow at a constant rate of 8% each year. The required return is 18%. What is Alpo's current share price?

    4. XXC expects earnings per share to be $6.00 next period. The retention rate is 60% and the return on equity (ROE) is 20%. The required return is 18%. What is XXC's stock price?

    Note- Interest is compounded annually and payments are at year end unless stated otherwise.

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    Solution Preview

    1.Baron Inc. bonds have a face value of $1000 and mature in 10 years. The coupon rate is 18%, and coupons are paid semiannually. The yield is 12% compound semiannually. Find the bond's price.

    Face Value=M=$1000
    Coupon rate=18% p.a.
    Semi annual coupon rate=18%/2=9%
    Semiannual Coupon amount, C=9% of face value=$1000*9%=$90
    Number of coupon payments left, n=10*2=20
    Annual Yield=12%
    Semi annual Yield, r=12%/2=6%

    Here, we are getting coupon payments on regular periods. It is a case of ordinary annuity with amount C=$90, discount rate=semi annual yield=6% and number of period=20.

    PV of ordinary annuity is given by= C/r*(1-1/(1+r)^n)

    PV of maturity ...

    Solution Summary

    There are four problems. Solution to second problem depicts the steps to calculate required rate of return on a preferred stock. Solutions to other problems demonstrate the methodology to estimate the values of a coupon paying bond and common stocks.

    $2.19

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