Bond Valuation Problem:

Cunningham Company has a bond issue of $1000 par value bonds with a 7% annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are currently selling to yield 5% rate of return.

Will the Cunningham Company bonds sell for a premium or a discount?

Calculate the current value (what an investor will pay today) of each Cunningham Company bond.

Stock Valuation Problem:

The English Corporation has a beta of 1.30x, the risk-free rate of interest is currently 9% and the required return on the market portfolio is 12%. The Company plans to pay a dividend of $1.30 per share in the coming year and anticipates that future dividends will increase at an annual rate consistent with that experienced over the 2006 2009 period as shown below:

Year Dividend per share

2009 $1.25

2008 $1.17

2007 $1.15

2006 $1.10

(I calculate the compound annual growth rate of dividends to be 4.35%, as follows :)

Financial calculator keystrokes:

1.10 +|- PV

3 N

0 PMT

1.25 FV

CPT I/Y = 4.35%

First, using CAPM, what is the required return for an investor in the English Company?

Now, using the constant dividend growth model, estimate the value of the English Companys common stock.