Fin 571 Week Two Problems
CHAPTER 5
A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?
“The value of a bond, its fair price, is the present value of its promised future payments for coupon and principal.” So we are solving for PV
FV= $1,000
N= 10
I= 9%
Pmt = 7.4% of $1,000 = $74
Future Value $1,000
Years 10 
Rate 9% 
PMT $74
Present Value ($897.32) INCORRECT Correct answer PV = $895.94
A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend …show more content…
Bret thinks that Medtrans will begin paying a dividend in four years, that the dividend will be $1.00, and that it will grow at 4% annually. James and Bret agree that the required return for Medtrans is 13%.
a. What value would James estimate for this firm?
Fair price = starting dividend/ (required return  growth rate)
Fair price = $1.00 / (136) % = 1/7%= 1/0.07 = $14.29 INCORRECT
CORRECT ANSWER B20. a. P1 = D2 / (r  g) = $1.00 / (0.13  0.06) = $14.29
P0 = $14.29 / (1 + 0.13)1 = $12.64
Now using calc functions from book N=2
b. What value would Bret assign to the Medtrans stock?
Fair price = starting dividend/ (required return  growth rate)
Fair price = $1.00 / (134) %= 1/9%= 1/0.09 = $11.11 INCORRECT
CORRECT ANSWER b. P3 = D4 / (r  g) = $1.00 / (0.13  0.04) = $11.11
P0 = $11.11 / (1 + 0.13)3 = $7.70
CHAPTER 7
C1. (Beta and required return) The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here.
  REALIZED RETURN 
State of Market Probability that Stock Market Chicago Gear 
 state occurs   
Stagnant 0.2

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