1. Summit systems will pay a dividend of $1.50 this year. If you expect summits dividend to grow by 6% per year, what is its price per share if its equity cost of capital is 11%?

2. Dorpa Corporation has a dividend yield of 1.5%. Dorpac’s equity cost of capital is 8 %, and its dividends are expected to grow at a constant rate. What is the expected to growth rate of Dorpac’s dividends?

3. Assume that a bond will make payments every six months as shown on the following timeline using six-month periods): 0 1 2 3

20

a. What is the maturity of the bond (in years)?

b. What is the coupon rate (in percent)?

c. What is the face value?

4. Suppose the current zero-coupon yield curve for risk-free bonds is as following

Maturity (years) 1 2 3 4 5

YTM 5.00% 5.50% 5.75% 5.95% 6.05%

a. What is the price per $100 face value of a two –year, zero-coupon, risk-free bond?

b. What is the price per $100 face value of a four-year, zero-coupon risk-free bond?

c. What is the risk-free interest rate for a five-year maturity?

5. Kell Industries has a share price of $22 today. If Kell is expected to pay a dividend of $0.88 this year, and its stock price is expected to grow to $23.54 at the end of the year, what is Kell’s dividend yield and equity cost of capital?

Maturity (years) 1 2 3 4 5

Zero-coupon 4.00% 4.30% 4.50% 4.70% 4.80%

6. What is the price today o a two-year, default free security with a face value of $1000

and an annual coupon rate of 6%. Does this bond trade a discount, at par, or at premium?

7. The prices of several bonds with face value of $1000 are summarized in the following table:

Bond A B C D

Price $972.50 $1040.75 $1150.00 $1000.00

For each bond, state whether it trades at a discount, at par or at a premium.

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