Question Fourteen

1. The Salem Company bond currently sells for 955 has a 12%coupon interest rate and a 1,000 par value, pays interest annually, and has 15 years to maturity.

1. Calculate the yield to maturity (YTM) on this bond.
2. Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond.

2. Calculate the value of a 5,000-par-value bond paying quarterly interest at an annual coupon interest rate of 10% and having 10 years until maturity if the required return on similar-risk bonds is currently a16% annual rate paid quarterly.

3. Erwin Footwear wishes to assess the value of its Active Shoe Division. This division has debt with a market value of 12,500,000 and no preferred stock. Its weighted average cost of capital is 10%. The Active Shoe Divisions estimated free cash flow each year from 2013 through 2016 is given in the following table. Beyond 2016 to infinity, the firm expects its free cash flow to grow at 4% annually.

Year	Free Cash Flow ()
2013	800,000
2014	1,200,000
2015	1,400,000
2016	1,500,000

1. Use the free cash flow valuation model to estimate the value of Erwins entire Active Shoe Division.
2. Use your finding in part (i) along with the data provided above to find this divisions common stock value.
3. If the Active Shoe Division as a public company will have 500,000 shares outstanding, use your finding in part (ii) to calculate its value per share

4. Perry Motors common stock just paid its annual dividend of 1.80 per share. The required return on the common stock is 14%. Estimate the value of the common stock under each of the following assumptions about the dividend:

1. Dividends are expected to grow at an annual rate of 0% to infinity.
2. Dividends are expected to grow at a constant annual rate of 5% to infinity.
3. Dividends are expected to grow at an annual rate of 5% for each of the next 3 years, followed by a constant annual growth rate of 4% in years 4 to infinity