Problem Set 2

# Problem Set 2 - FI 311H Financial Management Professor...

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FI 311H- Financial Management - Professor Hadlock Problem Set #2 Due by 5:00 p.m. September 27th Chapter 5 Problems #1. Consider a pure-discount bond that matures in exactly 12 years and pays \$1,000 at maturity. (a) What is the value of the bond if the discount rate is 6%? (b) What is the value of the bond if the discount rate is 12%? (c) Assuming the bond is priced at the value you calculated in (b), what is the bond’s yield-to- maturity? #2. Consider a level-coupon bond with the following parameters: Principal (i.e., face value) \$1,000 Time to maturity 10 years Coupon rate 8% annually (i.e., 4% each 6-months) Payments semiannually Appropriate semi-annual discount rate 5% (this is the correct discount rate for cash flows delivered 6 months from today) What is the value of the bond? #3. A firm just paid its \$4 annual dividend. Historically the dividend has grown 6% per year and this trend is expected to continue for the foreseeable future. Given the riskiness of the firm’s profits, the appropriate discount rate for the firm’s dividend stream is 12%. (a) What should the current price for the stock be? (b) What will the stock price be 5 years from today? #4. A firm just paid its \$1 annual dividend. The dividend is expected to grow at a 12% annual rate for the next 4 years (i.e., 4 periods of growth at 12%) and then growth will slow down to 5% (i.e., growth at 5% for all subsequent periods). Given the riskiness of the firm’s profits, the appropriate discount rate for the firm’s dividend stream is 10%. What should the current price for the stock be? #5. A firm’s earnings this past year were \$40 million. The firm’s return on equity remains on its historical trend of 12 percent, and the firm maintains a policy of retaining 50 percent of its earnings. What is the firm’s growth rate of earnings? What will next year’s earnings be? #6. XYZ Corp has just reported earnings of \$20 million and has paid its annual dividend. The firm retains 75 percent of its earnings and expects to continue to do so. The company has 1.25 million shares of common stock outstanding. The stock is selling for \$60 and the company’s

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Problem Set 2 - FI 311H Financial Management Professor...

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