Finance

Assume Gillette Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the 5th year. Thereafter, growth will level off at 2% per year. According to the dividend-discount model, what is the value of a share of Gillette stock if the firm's equity cost of capital is 8%?

15.08

A BBB rated corporate bond has a YTM of 8.2%. A US treasury security has a YTM of 6.5%. These yields are quoted as APR s with semi-annual compounding. Both bonds pay semiannual coupons at a rate of 7% and have 5 years to maturity a. What is the price of the treasury bond? b. What is the price of the BBB-rated corporate bond? c. What is the credit spread on the BBB bonds?

a. 1021.06% N= 10 I = 6.5/2 PV= ? PMT = .07*1000/2 = 35 FV=$1000 b. 951.58% N= 10 I=8.2/2 = 4.1 PV = ? PMT = 35 FV = 1000 c. 1.7 8.2-6.5

3. Anle corportation has a current stock price of $20 and is expected to pay a dividend of $1 in one year. Its expected stock price right after after paying that dividend is $22 a. What is Anle's equity cost of capital? b. How much of Anle's equity cost of capital is expected to be satisfied by dividend yield and how much by capital gain?

a. 15% (22+1)/20 b. 5% 1/20 c. 10% (22-20)/20

28. Andrew industries is contemplating issuing a 30 yr bond with a coupon rate of 7% (annual) and a face value of $1,000. Andrew believes it can get a rating of A from Standard & Poor's. However, due to recent financial difficulties at the company, Standard & Poor's, is warning that it may downgrade Andrew Industries' bonds to BBB. Yields on A-rated, long-term bonds are currently 6.5% and yields on BBB-rated bonds are 6.9% a. What is the price of the bond if Andrew Industries maintains the A rating for the bond issue? b. What will be the price of the bond if it is downgraded?

a. $1065.29 N=30 I= 6.5 PV = ? PMT = 1000*7% FV = $1000 b. $1012.53 N=30 I=6.9% PV = ? PMT = 70 FV= 1000

4. Suppose Acap Corporation will pay a dividend of $2.80 per share at the end of this year and $3.00 per share next year. You expect Acap's stock price to be $52.00 in two years. Assume that Acap's equity cost of capital is 10% a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for two years? b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one year? c. Given your answer in (b) what price would you be willing to pay for a share of Acap stock today if you planned to hold the stock for one year? How does this compare to you answer in (a)?

a. $48 Div1/(1+r) + (Div2+P2)/(1+r)^2 2.54 +(55/1.1^2) b. $50 3+(52/1.1) c. $48

9. DFB inc expects earning this year of $5.00/share and it plans to pay $3 dividend to shareholders. DFB will train $2/share of its earnings to reinvest in new projects that have an expected return of 15% per year. Suppose DFB will maintain the same dividend payout rate, retention rate, and return on new investments in the future and will not change its number of outstanding shares Assume next divide is due in one year. a. what growth rate of earnings would you forecast for DFB? b. If DFB's equity cost of capital is 12% what price would you estimate for DFB stock? c. Suppose instead that DFB plans to pay a dividend of $4/share next year and retains only $1 / share in earnings. That is, it chose to pay a higher dividend instead of reinvesting in as many new projects. if DFB maintain this higher payout rate in the future, what stock price you would estimate for the firm now? Should DFB follow this new policy?

a. 6% 2/5 * .15 b. $50 c. $44.44 (1/5).15 = .03 4/(.12-.03) = 44.44 c. No, should not raise dividends because the projects are positive NPV

Suppose you purchase a 30 yr, 0 coupon bond with a YTM of 6%. You hold the bond for 5 yrs before selling it a. If the bond's YTM is 6% when you sell it, what is the annualized rate of return of your investment? b. 7%? c. 5%? d. Even if a bond has no chance of default, is your investment risk free if you plan to sell it before it matures? explain

a. 6% b. 1.13% c. 11.15% Risky bc YTM may change

7. Dorpac corporation has a dividend yield of 1.5%. Its equity cost of capital is 8% and its dividends are expected to grow at a constant rate a. What is the expected growth rate of Dorpac's dividends b. What is the expected growth rate of Dorpac's share price?

a. 6.5% 8%-1.5% b. With constant dividend growth, the share price is also expected to grow at rate g=6.5%

16. Suppose a 10 yr $1,000 bond with an 8% coupon rate and semiannual coupons is trading for $1,034.74 a. What is the bond's YTM (expressed as an APR with with semiannual compounding)? b. If the bond's YTM changes to 9% APR what will be the bond's price?

a. 7.5 N=20 PV=1034.74 PMT= 1000*8% / 2 PV = 1000 b. $934.96 N=20 I= 4.5 PMT = 40 FV = 1000

9. Your firm has taken out a $ 500 comma 000$500,000 loan with 9.0 %9.0% APR​ (compounded monthly) for some commercial property. As is common in commercial real​ estate, the loan is a 55​-year loan based on a 1515​-year amortization. This means that your loan payments will be calculated as if you will take 1515 years to pay off the​ loan, but you actually must do so in 55 years. To do​ this, you will make 5959 equal payments based on the 1515​-year amortization schedule and then make a final 60th payment to pay the remaining balance. ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.) a. What will your monthly payments​ be? b. What will your final payment​ be?

a. What will your monthly payments​ be? The monthly payments will be ​$ 5071.33 b. What will your final payment​ be? The final payment will be ​$ 405,411.15