1. Andrew Industries is considering issuing a $1000 face value corporate bond paying annual coupons with a maturity of 30 years and a 7% coupon rate, which it believes will be eligible for an A rating from Standards & Poor's. I received a warning from Standard Poor's that the company's BBB could lower its credit rating due to recent financial difficulties. Long-term corporate bonds rated A are trading at a maturity yield of 6.5% and corporate bonds rated BBB at 6.9%.

a. If this company can maintain A grade, what is the price of the issuing corporate bond

b. If this company's credit rating declines, what is the price of the issuing corporate bond?

2.

Assume that Acap Corporation will pay dividends of $2.80 in year 1 and $3 in year 2. Acap's share price is expected to be $52 in Year 2. The cost of equity capital is 10%. a. Assuming you hold stock for two years, what do you expect the current stock price to be? b. Assuming you only hold stock for one year, how much do you expect to sell your stock in one year? c. Given the answer to (b), and holding stock for one year, what would the current share price be? How can this price be compared to the price in (a)?