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    Various problems in Bonds and Dividends

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    Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The
    bonds will mature in 25 years. Compute the current price of the bonds if the
    present yield to maturity is:
    a. 7 percent.
    b. 10 percent.
    c. 13 percent.

    Harrison Ford Auto 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.

    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.

    Friedman Steel Company will pay a dividend of $1.50 per share in the next
    12 months (D1). The required rate of return (Ke) is 10 percent and the constant
    growth rate is 5 percent.
    a. Compute P0.
    b. Assume Ke, the required rate of return, goes up to 12 percent; what will be
    the new value of P0?
    c. Assume the growth rate (g) goes up to 7 percent; what will be the new
    value of P0?
    d. Assume D1 is $2, what will be the new value of P0?

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    Solution Preview

    Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The
    bonds will mature in 25 years. Compute the current price of the bonds if the
    present yield to maturity is:
    a. 7 percent.
    b. 10 percent.
    c. 13 percent.

    The price of the bond is the sum of the present value of the cash flows. The cash flows from a bond are the periodic interest payments and the repayment of principal. The periodic interest payments are in the nature of an annuity and the present value can be found by using the PVIFA table. The principal repayment is a lump sum and the PV can be found by using the PVIF table. At 8% interest, the interest amount per year is $80. The YTM is the discounting rate.
    a. YTM is 7%. For the PV of the interest we use the PVIFA table. Under 25 years and 7%, the annuity factor comes to 11.654. The PV of the interest ...

    Solution Summary

    The solution has 4 problems dealing with bonds and dividends

    $2.19

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