Question
12-1: Jerry and his wife just purchased the U.S. Treasury bond, and they have annual income $300,950. The bond will pay a lump sum of
12-1: Jerry and his wife just purchased the U.S. Treasury bond, and they have annual income $300,950. The bond will pay a lump sum of $1,000 exactly 4 years from today. The nominal interest rate is 6%. If the coupon rate is 8%, and compounded semiannually, answer the following questions:
- How much should they pay for the bond price?
- As an alternative, someone suggests to buy a State of North Carolina bond with exactly the same term, which one should they choose, Treasury bond or Sate bond? Why?
- If the nominal rate goes up, how does that affect the bond price?
12-2. Dyer Furnitures current dividend is $2.00 per share, and the dividend is expected to grow at a constant rate of 6.00% per year in the future. The companys beta is 1.2, the return on S&P500 is 9.50%, and the return on 3-month Treasury Bill is 3.00%. Answer the following questions:
- What is Dyer's required rate of return on its stock?
- What is Dyer's current stock price if the dividend grows at 6% forever?
- What will be Dyer's current stock price if the dividend does not grow in the future?
12-3. Kinkead Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be $10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm's value of operations, in millions?
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