Applied Software has a $1,000 par value bond outstanding that pays 13 percent interest with annual payments. The current yield to maturity on such bonds in the market is 11 percent. Use Appendix B and Appendix D.

Compute the price of the bonds for these maturity dates: (Round "PV Factor" to 3 decimal places. Do not round intermediate calculations. Round the final answers to 2 decimal places.)

	Price of the bond
a. 25 years	$
b. 19 years	$
c. 5 years	$

Ron Rhodes calls his broker to inquire about purchasing a bond of Golden Years Recreation Corporation. His broker quotes a price of $1,160. Ron is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 12 percent annual interest payable semiannually, and has 20 years remaining until maturity. The current yield to maturity on similar bonds is 8 percent.

a. Compute the new price of the bond. Use Appendix B and Appendix D. (Round "PV Factor" to 3 decimal places. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

New price of the bond $

b. Do you think the bond is overpriced?

• No

• Yes

Martin Shipping Lines issued bonds ten years ago at $1,000 per bond. The bonds had a 30-year life when issued, with semiannual payments at the then annual rate of 9 percent. This return was in line with required returns by bondholders at that point, as described below:

Real rate of return	5	%
Inflation premium	4
Risk premium	2
Total return	11	%

Assume that today the inflation premium is only 1 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds.

Compute the new price of the bond. Use Appendix B and Appendix D. (Round "PV Factor" to 3 decimal places. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

New price of the bond $

Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond with semiannual payments has 8 percent annual interest and has 15 years remaining to maturity. The current yield to maturity on similar bonds is 14 percent. (Round "PV Factor" to 3 decimal places. Do not round intermediate calculations. Round the final answers to 2 decimal places.)

a. What is the current price of the bonds? Use Appendix B and Appendix D.

Current price $

b. By what percent will the price of the bonds increase between now and maturity?

Price increases by %

c. What is the annual compound rate of growth in the value of the bonds? (Use Appendix A)

Annual compound rate %

Airdrie Lanes preferred shares pay an annual dividend of $1.20, payable on a quarterly basis. Current yields of similar risk preferred shares are 3 percent.

What is the price of each preferred share?

Price of preferred share $

Stagnant Iron and Steel Co. currently pays a $10.10 annual cash dividend (D₀). It plans to maintain the dividend at this level for the foreseeable future, as no future growth is anticipated.

If the required rate of return by common shareholders (K_e) is 20 percent, what is the price of each common share? (Round the final answer to 2 decimal places.)

Price of common share $

The Fleming Corporation paid a dividend of $0.75 last year. Over the next 12 months, the dividend is expected to grow at 8 percent, which is the constant growth rate for the firm. The new dividend after 12 months will represent D₁. The required rate of return is 15 percent.

Compute the price of a common share. (Round the final answer to 2 decimal places.)

Common share price $

A firm pays a $1.80 dividend at the end of year one. It has a share price of $50 (P₀) and a constant growth rate (g) of 9 percent.

a. Compute the required (expected) rate of return (K_e). (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Required rate of return %

Also indicate whether each of the following changes would make the required rate of return (K_e) go up or down. (In each question below, assume only one variable changes at a time. No actual numbers are necessary.)

b. If the dividend payment increases;

• K_e will go up.

• K_e will go down.

• K_e remains constant.

c. If the expected growth rate increases;

• K_e will go up.

• K_e will go down.

• K_e remains constant.

d. If the stock price increases;

• K_e will go up.

• K_e will go down.

• K_e remains constant.