Question
1. A few years ago Escape Cruise Lines issued bonds with a face value of $1000, a coupon rate of 12 percent and a maturity
1. A few years ago Escape Cruise Lines issued bonds with a face value of $1000, a coupon rate of 12 percent and a maturity date of July 2035. Interest payments are made semi-annually.
a) Determine the present value of the bond's cash flows if the required rate of return is 12 percent.
b) How would the present value change if the required return is 14 percent instead? And if the required return is 10 percent instead? What bond pricing principle do these changes demonstrate?
2. Last year JNJ had earnings per share of $7.40 and paid a dividend per share of $4.25. Assume that the required return for JNJ is 8.5 percent. If earnings and dividends are expected to grow at 6 percent, what is the implied price for a share of JNJ based on the Gordon (constant dividend growth) model.
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