Stock & Bond Valuation Problem Set Please up-load your solutions to Canvas either as a pdf or Word document. Must show each question with your response below in a different color font. If hand- writing your solutions, make sure to write neatly. This will be graded based on accuracy. Students MUST show work using the appropriate present value or future value formula to receive credit. You may not use Excel or a financial calculator to solve these problems. Must show work as instructed to receive credit. Total 100 points; 10 points per question.

1. Find the price of 6.5% coupon bond with 30 years to maturity and a par value of $1,000. The market interest rate = 5%. Assume coupons are paid semi-annually. 2. Use the term structure of interest rates shown below represent the spot rates for 1-, 2-, 3-, 4-, and 5-year zero-coupon bonds. below to solve question 2. Maturity (years) Spot Interest Rate Discount Factor (assuming semi-annual compounding) 1 3.5% 2 3.55% 3 3.60% 4 3.75% 5 3.80%

a) Calculate the discount factor assuming semi-annual compounding. Show a sample calculation for one of the numbers below: b) What are the current prices of a 5-year zero-coupon bond and a 4-year zero- coupon bond each having a par value = $1,000? c) What is the price of a bond that pays the following cash flows (assuming semi- annual compounding)? $50 in years 1, 2 & 3 $1,000 in year-3

3. Consider the following two bonds both having a par value of $1,000. - 30-year bond that pays a 5% annual coupon - 2-year bond that pays a 5% annual coupon A) What is the price of each bond assuming the market interest rate = 5%? B) What is the price of each bond if the market interest rate decreases to 4%? C) What do you notice about the percent change in each bonds price for the same decline in interest rate?

4. A 15-year bond with $1,000 par has a 9.0% yield-to-maturity. The bond pays a 7.5% semi-annual coupon. What is the current price of the bond?

5. A par bond has a 9% yield-to-maturity. What is the bonds coupon rate? Explain.

6. AC/DC Electric Co. just paid a $3.00/share dividend. The firm plans to increase its dividend by 2.5% per year indefinitely. If shareholders require a 10% return, how much per share would you pay for the company today?

7. Circle Builders Inc. preferred stock that pays a yearly dividend of $4.75. The companys cost of preferred stock is 5.25%. What is the share price of the preferred stock?

8. Iron Maiden Foundry Inc. has earnings of $5.50/share. The benchmark P/E for the company is 10. What is the appropriate stock price using P/E analysis?

9. Muscle Motors, a car company specializing in vintage cars, just paid a dividend on its common stock of $2.50/share. The required return of the companys common stock is 15% a) Calculate the price of its common stock if dividends grow at 0% per year b) Calculate the price of its common stock if dividends grow at an annual rate of 3.25%. c) Calculate the price of its common stock if dividends grow at an annual rate of 5% for the first three years; followed by 2.5% annual growth thereafter. Hint: Use a timeline showing the dividends in each year and then calculate the present value.

10. A common way to value the stock of dividend-paying firm is to value the expected dividends over a 3-year period and then find a terminal stock price using a benchmark PE ratio. Beatles Exterminating Inc. just paid a dividend of $1.75/share, which is expected to grow 10% per year over the next three years. In three years, the estimated payout ratio is 25% and the expected PE ratio is 15. (Recall a firms payout ratio = per share dividend / EPS). If Beatles Exterminating has a 10% cost of equity capital, what is its stock price today?