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HW3-Key

# HW3-Key - Answer key to Problem Set 3 1(3 points McGriff...

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1 Answer key to Problem Set 3 1. (3 points) McGriff Motors has bonds outstanding which will mature in 12 years. The bonds pay a 12 percent semiannual coupon and have a face value of \$1,000 (i.e., the bonds pay a \$60 coupon every six months). The bonds currently have a yield to maturity of 10 percent. The bonds are callable in 8 years and have a call price of \$1,050. What are the bonds' yield to call? (Show your formula first, then use excel of financial calculator to get the answer) First use bonding pricing formula to calculate current bond price Bond price = \$1137.99 (coupon payment \$60, discount rate 10%/2, number of periods is 24) Then use the bond pricing formula too to get yield to call. The answer is about 9.88% 2. (3 points) Cartwright Brothers' stock is currently selling for \$40 a share. The stock is expected to pay a \$2 dividend at the end of the year. The stock's dividend is expected to grow at a constant rate of 7 percent a year forever. The risk-free rate (r RF ) is 6 percent and the market risk premium (r M - r RF ) is also 6 percent. What is the stock's beta?

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