Yield of a Bond that Trades at a Discount

Fin 534

Chapter 8 Problem 9

Explain why the yield of a bond that trades at a discount exceeds the bond's coupon rate?

Chapter 8 Problem 24

Assume there are four default-free bonds with the following prices and future cash flows:

Cash flows
Bond Price Today Year 1 Year 2 Year 3
A $934.58 1000 0 0
B 881.66 0 1000 0
C 1,118.21 100 100 1100
D 839.62 0 0 1000

Do these bonds present and arbitrage opportunity? If so, how would you take advantage of the opportunity? If not, Why not?

Chapter 9 Problem 5

NoGrowth corporation currently pays a divedend of $2 per year, and it will continue to pay this dividend forever. What is the priceper share if its equity cost of capital is 15% per year?

Chapter 9 Problem 12

Colgate-Palmolive Company has just paid an annual dividend of $0.96. Analysts are predicting an 11% per year growth rate in earnings over the next five years. After then, Colgate's earning are expected to grow at the current industry average of 5.2% per year. If Colgate's equity cost of capital is 8.5% per year and its dividend payout ratio remains constant, what price does the dividend-discount model predict colgate stock should sell for?

Chapter 9 Problem 21

Consider the valuation of Kenneth Cole Production in Example 9.7.

a. suppose you believe KCP's initial revenue growth rate will be between 4% and 11% (with growth slowing in equal steps to 4% byyear 2011). What range of share prices for KCP is consistent with these forecasts?

b. Suppose you believe KCP's EBIT margin with be between 7% and 10% of sales. What range of share prices for KCP is consistent with these forecasts (keeping KCP's initial revenue growth at 9%)?

c. Suppose you believe KCP's weighted average cost of capital is between 10% and 12%. What range of share prices for KCP is consistent with these forecasts (keeping KCP's initial revenue growth and EBIT margin at 9%)?

d. What range of share prices is consistent if you vary the estimate as in parts (a), (b), and (c) simultaneously?