1. Bond Valuation IBM 8s 40 FA

VB = ?, F = $1,000, CR (coupon rate) = 8%, m = 2 (semiannual), and id (discount rate) = 10% (rrr).

P = PV (CF) = PV (Int; F) = PV (ann) + PV (ls) = PMT (PVIFA) + F (PVIF)

VALUE = Price => solve for the price you are willing to pay with a 10% required return.

2. Internal Rate of Return IBM 10s 30 JJ

$1,297.55 = INT (PVIFA) + F (PVIF) = $1,152.47 = INT (PVIFA) + Face (PVIF) wherein err = irr to make the equation true

err: $1,297.55 = (INT/2) [(1 ((1/(1+ irr/2) 2*n))) / (irr/2)] + F (/(1+(irr/2))2*n )

Using the price as $1,297.55 = VB , calculate the Internal Rate of Return for the investment.

EQUITY VALUATION Based on expected cash flow as represented with dividends:

V = D/k or V = D1/(kg) or V = S [Dn/(1+ k)n] + [Dn+1 /(k-g)]/(1+k)n

Given rrr = 12%

3. No growth: dividend has been and expected to remain $2 per year

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4. Growth: recent $2 dividend is expected to grow by 6% (representing firms growth) into the future

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5. Variable growth: new product should enable 12% growth for two years, then 8% for two years, thereafter competition will force the firm back to its competitive 3% growth

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