Financial Question

1437 Words Mar 6th, 2012 6 Pages
cial solution
Golden Apples
Professor Jerry Langham
MBA 554: 262
27 January 2009
Chapter 5: Problems 1, 2, 3, 4, 7, 12, & 25
1. Bond Yields. A 30-year Treasury bond is issued with face value of $1,000, paying interest of $60 per year. If market yields increase shortly after the T-bond is issued, what happens to the bond’s a. coupon rate? The fixed rate is 6% and will not change the $60 per year. b. price? Price is dependent upon the market interest rate. If the market interest rate goes up, the bond price goes down; if the interest rate goes down, the price of the bond must increase. c. yield to maturity? If the market yield increases, the yield to maturity will increase, and vice versa. d. current yield? Current rate = coupon
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Dividend yield = Dividend ÷ Price DY = 8/66.67 = .12 = 12% Capital gains yield rate= (dividend ÷ price) + growth rate .12 = 8/66.67 + g .12 = .12 + g g = 0 Therefore the capital yield gain is 0.

Expected Rate of Return r = 8/66.67 + 0 = .12 = 12%
4. Constant-Growth Model. Waterworks has a dividend yield of 8 percent. If its dividend is expected to grow at a constant rate of 5 percent, what must be the expected rate of return on the company’s stock? Rate = (dividend ÷ price) + growth rate r = .08 + .05 = .12 = 12%

13. Constant-Growth Model. Gentleman Gym just paid its annual dividend of $3 per share, and it is widely expected that the dividend will increase by 5 percent per year indefinitely. What price should the stock sell at? The discount rate is 15 percent. Price = Dividend ÷ (rate – growth rate) P = 3 * 1.05 /(.15 - .05) = $31.50 Note: Multiply the dividend by 1.05 because the growth rate of .05 applies to the Div1 for the current year’s growth. How would your answer change if the discount rate were only 12 percent? Why does the answer change? P = 3 * 1.05 /(.12 - .05) = $45 The less that the discount rate is, the less the denominator becomes which cause the dividend to increase.
17.Negative Growth. Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all shrinking at a rate of 10
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