FINA215
Problem Solving
Fall 2009
1
Problem set on Chapter 3, pp.9092.
1.
935 = 75(PVIFA
rr, 5
) + 980(PVIF
rr, 5
)
rr = 8.83%
4.
EXCEL Problem: Bond Value = $1,268.27
Bond Value = $1,169.36
Bond Value = $1,000.00
Bond Value = $862.01
6.
EXCEL Problem: Yield to Maturity = 9.87%
Yield to Maturity = 9.19%
Yield to Maturity = 7.69%
Yield to Maturity = 5.97%
9.
a. V
b
= 1,000(.1)
(PVIFA
6%/2, 10(2)
) + 1,000(PVIF
6%/2, 10(4)
) = $1,297.55
2
b.
V
b
= 1,000(.1)
(PVIFA
8%/2, 10(2)
) + 1,000(PVIF
8%/2, 10(4)
) = $1,135.90
2
c.
From parts a. and b. of this problem, there is a negative relation between required rates and
fair values of bonds.
18.
a. P
o
= 2.50(1 + .015)
= $24.167
.12  .015
b.
P
4
= 2.50(1 + .015)
5
= $19.95
.15  .015
20.
Step 1: Find the present value of dividends during the period of supernormal growth.
Year
Dividends (D
0
(1 + g
s
)
t
)
PVIF
10%, t
Present Value
1
5.5(1 + .08)
1
= 5.940
.9091
5.400
2
5.5(1 + .08)
2
= 6.415
.8264
5.302
3
5.5(1 + .08)
3
= 6.928
.7513
5.205
4
5.5(1 + .08)
4
= 7.483
.6830
5.111
5
5.5(1 + .08)
5
= 8.081
.6209
5.018
6
5.5(1 + .08)
6
= 8.728
.5645
4.927
Present value of dividends during supernormal growth period $30.963
Step 2: Find present value of dividends after period of supernormal growth
a. Find stock value at beginning of constant growth period
P
6
=
D
7
= D
0
(1 + g
s
)
6
(1 + g)
1
= 5.5 (1 + .08 )
6
(1 + .03)
1
= $128.423
k
s
 g
k
s
 g
.10  .03
b. Find present value of constant growth dividends
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 Spring '12
 Dakroub
 Finance, Interest Rates, Bond duration, Zerocoupon bond

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