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Calculating bond's value, stock's value, preferred stock r.


A1. (Bond valuation) A 1,000 face value bond has remaining maturity of 10 years and a required return of 9%. The bond's coupon rate is 7.4%. What is the fair value of this bond?

A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividends payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%.

A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The preferred dividend is nongrowing. What is the required return on James River preferred stock?

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I can help you with problem A1 if you prefer to use financial calculator.

A1. To find the value of the bond

The equation used to solve this question is the bond's value equation.

Bond's value, VB = INT / (1 + rd)^1 + INT / (1 + rd)^2 + . . . + INT / (1 + rd)^N + M / (1 + rd)^N

We could simply discount each cash flow back to the present and sum these PVs to find the bond's value. However, this procedure is not very efficient, especially ...

Solution Summary

This solution shows a step-by-step calculation of the bond's value, common stock's value, and required return for a preferred stock. It provides students with a clear perspective of the differences between bond, common stock, and preferred stock.