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Finance : Bond Returns, Stock Price and Growth Rate

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1. Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If you require a nominal annual rate of return of 12 percent, with quarterly compounding, how much should you be willing to pay for this bond? (Hint: The PVIFA and PVIF for 3 percent, 60 periods are 27.6748 and 0.1697, respectively.)

a. $821.92
b. $1,207.57
c. $986.43
d. $1,120.71
e. $1,358.24

2. A stock is not expected to pay a dividend over the next four years. Five years from now, the company anticipates that it will establish a dividend of $1.00 per share (i.e., D5 = $1.00). Once the dividend is established, the market expects that the dividend will grow at a constant rate of 5 percent per year forever. The risk-free rate is 5 percent, the company's beta is 1.2, and the market risk premium is 5 percent. The required rate of return on the company's stock is expected to remain constant. What is the current stock price?

a. $7.36
b. $8.62
c. $9.89
d. $10.98
e. $11.53

3. Grateway Inc. has a weighted average cost of capital of 11.5 percent. Its target capital structure is 55 percent equity and 45 percent debt. The company has sufficient retained earnings to fund the equity portion of its capital budget. The before-tax cost of debt is 9 percent, and the company's tax rate is 30 percent. If the expected dividend next period (D1) and current stock price are $5 and $45, respectively, what is the company's growth rate?

a. 2.68%
b. 3.44%
c. 4.64%
d. 6.75%
e. 8.16%

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1. Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If you require a nominal annual rate of return of 12 percent, with quarterly compounding, how much should you be willing to pay for this bond? (Hint: The PVIFA and PVIF for 3 percent, 60 periods are 27.6748 and 0.1697, respectively.)
a. $821.92
b. $1,207.57
c. $986.43
d. $1,120.71
e. $1,358.24

FV = 1000
Payment (per quarter) = 37.50
Number of quarters = 15 * 4 = 60
Return rate = 12%/4 = 3%
Then PV of payments = PVIFA*Payment = 37.50 * 27.6748 = 1037.81
PV of FV = PVIF * FV = 1000 * 0.1697 = ...

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