Case #3 - Valuation Company X issued $10,000,000 valued of bonds with 30 years maturity five years ago. The bonds have a coupon rate of 10.125% with semi-annual payments and have a par value of $1000. The current price of those bonds is $879.625. 25-year Treasury bonds with 6.825% coupon with semi-annual payments trade at $975.42.

1-What is the yield spread between corporate bonds and treasury bonds? Would you buy company Xs bonds if your required return is 11%?

2-Company X preferred stocks have a current price of $42, par value of $50 and a dividend of 10% of par. Would you buy the preferred stock if your required return is 12.5% for investing in preferred stocks of similar risk? Assume there are 50,000 preferred stocks outstanding.

3-Company X has EPS of $1.89, 750,000 common stock outstanding and its most recent dividend was $0.65. The most recent net income was $1,417,500 and has a book value of common stock equal to $6,000,000. The firm has been growing constantly and this constant growth is expected to continue for long time in the future. The required return of the stockholders is 18%. The value of the common stock in the market is $45. The firms most recent Free Cash Flow was $109,237 and its WACC is 15.83%. Would you be willing to purchase the common stock of this company?

4-Assume now that the company will go through three phases of growth: Fast growth of 25% for years 1 to 6 Moderate growth of 20 % for years 7 to 10 Constant growth of 15% after year 11 Would you purchase this companys stock based on this growth potential?