HW2.pdf - Corporate Finance HW 2 Due on Nov 16 th 2016 1...

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Corporate Finance HW 2 Due on Nov, 16 th , 2016 1 Consider the following two types of bonds: Bond A: A ten year zero coupon Bond Bond B: A ten year, 10% coupon bearing Bond, paying the coupon once every year. Both bonds have a face value of $1,000 and have a similar risk. For that reason the yield to maturity of both bonds is 9%. A What are the current prices of the above two types of bonds? B Suppose that next year, when you plan to see the bonds, the yield to maturity of the bonds remains at 9%. What rate of return will each of the bonds generate over the year? Can you identify the current yield and the capital gains yield? C Suppose instead that the yield to maturity of the bonds drops to 7% at the end of the year. Re-calculate the rates of return of each of the bonds. 2 Cogent Consultants expects to earn $8.46 per share next year, which, following past practice; it will pay out to shareholders as a cash dividend. The firm’s new CEO, however, would like to permanently change policy and pay out only 40% of earnings and retain the remaining 60% for investment in new projects. The CEO believes that
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