1. A 25 year bond was issued with a coupon rate of 7% in October 2010. It has a $1,000 face value and pays a quarterly coupon. If the yield to maturity is 6%, set up a formula to calculate the current bond price.

2. As an analyst, you are trying to estimate a fair price for stock XYZ. You tried the constant growth dividend discount model but this did not work well because the company pays a very low dividend and only increases it a little bit once a year. Which of the following is false?

(a) There are some investors who prefer low dividends to reduce tax liability

(b) XYZs low dividend policy is probably a choice by management so they will always have enough cash to pay the dividend investors expect

(c) XYZ stock price can still be estimated using a free cash flow analysis as this is not affected by dividend choice

(d) The best estimate of stock price for companies that do not pay a dividend is the book value of equity