Q1) Microhard has issued a bond with the following characteristics: Principal: $1,000

Term to maturity: 20 years Coupon rate: 8 percent Semi-annual payments Calculate the
price of the Microhard bond if the stated annual interest rate is:

8%
10%
6%

p
time
coupon rate
coupon payemet

present value of bond

Q2) Consider a bond with a face value of $1,000. The coupon is paid semi-annually
and the
market interest rate is 12 percent. How much would you pay for the bond if:
a. the coupon rate is 8 percent and the remaining time to maturity is 20 years?
b. the coupon rate is 10 percent and the remaining time to maturity is 15 years?

Q3) Pettit Trucking has issued an 8-percent, 20-year bond that pays interest semi-annually. If
the
market prices the bond to yield an effective annual rate of 10 percent, what is the price of
the bond?
pv

Q4) Consider the stock of Davidson Company that will pay an annual dividend of $2 in
the coming year. The dividend is expected to grow at a constant rate of 5 percent
permanently.
The market requires a 12-percent return on the company.
a. What is the current price of a share of the stock?
b. What will the stock price be 10 years from today?

5. Consolidated Edison, Inc. (Con Edison), is a regulated utility company that services
the New York City area. Suppose Con Edison plans to pay $2.36 per share in dividends
in the coming year. If its equity cost of capital is 7.5% and dividends are expected to
grow by 1.5% per year in the future, estimate the value of Con Edison’s stock.

6. Consider two bonds, bond A and bond B, with equal rates of 10 percent and the same
face
values of $1,000. The coupons are paid annually for both bonds. Bond A has 20 years
to maturity while bond B has 10 years to maturity.

a. What are the prices of the two bonds if the relevant market interest rate is 10 percent?

b. If the market interest rate increases to 12 percent, what will be the prices of the two
bonds?
c. If the market interest rate decreases to 8 percent, what will be the prices of the two
bonds?

7.Consider a bond that pays an $80 coupon annually and has a face value of $1,000.
Calculate the yield to maturity if the bond has a. 20 years remaining to maturity and it
is sold at $1,200.
b. 10 years remaining to maturity and it is sold at $950.

8.The newspaper reported last week that Bradley Enterprises earned $20 million. The
report also stated that the firm’s return on equity remains on its historical trend of 14
percent. Bradley retains 60 percent of its earnings. What is the firm’s growth rate of
earnings? What will next year’s earnings be?

9-Anle Corporation has a current price of $20, is expected to pay a dividend of $1 in

one year, and its expected price right after paying that dividend is $22. a. What is
Anle’s expected dividend yield? b. What is Anle’s expected capital gain rate? c. What
is Anle’s equity cost of capital?

10. Krell Industries has a share price of $22 today. If Krell is expected to pay a
dividend of $0.88 this year, and its stock price is expected to grow to $23.54 at the end
of the year, what is Krell’s dividend yield and equity cost of capital?
11. NoGrowth Corporation currently pays a dividend of $2 per year, and it will
continue to pay this dividend forever. What is the price per share if its equity cost of
capital is 15% per year?

12.Dorpac Corporation has a dividend yield of 1.5%. Dorpac’s equity cost of capital is
8%, and its dividends are expected to grow at a constant rate. a. What is the expected
growth rate of Dorpac’s dividends?

13..Rudolph Co stock has just paid its annual dividend of $2.25. The expected growth
rate of Rudolph is 7% in the long run. If your required rate of return is 16%, how much
should you pay for a share of Rudolph stock?

14. Boston Corporation stock currently pays $6 annual dividend and sells at $62 per
share. The company expects to show continued growth at the rate of 4% per year. Find
the required rate of return by the stockholders.

15. Suppose the stock of the Quatram Company, a publisher of college textbooks, has a
beta of 1.3. The firm is 100-percent equity financed; that is, it has no debt. Quatram is
considering a number of capital-budgeting projects that will double its size. Because
these new projects are similar to the firm’s existing ones, the average beta on the new
projects is assumed to be equal to Quatram’s existing beta. The risk-free rate is 7
percent. What is the appropriate discount rate for these new projects, assuming a
market-risk premium of 9.5 percent.
16. Mitsubishi Inc. is a levered firm with a debt-to-equity ratio of 0.25. The beta of
common stock is 1.15, while the beta of debt is 0.3. The market-risk premium is 10
percent and the risk-free rate is 6 percent. The corporate tax rate is 35 percent.
a. If a new project of the company has the same risk as the common stock of the firm,
what is the cost of equity on the project?
b. If a new project of the company has the same risk as the overall firm, what is the
weighted average cost of capital on the project?

a-

18. First Data Co. has 20 million shares of common stock outstanding that are currently being
sold for $25 per share. The firm’s debt is publicly traded at 95 percent of its face value of $180
million. The cost of debt is 10 percent and the cost of equity is 20 percent. What is the
weighted average cost of capital for the firm? Assume the corporate tax rate is 40 percent.
17. The equity beta for Adobe Online Company is 1.29. Adobe Online has a debt-to-
equity ratio of 1.0. The expected return on the market is 13 percent. The risk-free rate is
7 percent. The cost of debt capital is 7 percent. The corporate tax rate is 35 percent.

a. What is Adobe Online’s cost of equity?

b. What is Adobe Online’s weighted average cost of capital?

19. Calgary Industries, Inc., is considering a new project that costs $25 million. The
project will generate after-tax (year-end) cash flows of $7 million for five years. The
firm has a debt-to-equity ratio of 0.75. The cost of equity is 15 percent and the cost of
debt is 9 percent. The corporate tax rate is 35 percent. It appears that the project has the
same risk as that of the overall firm. Should Calgary take on the project?

yr
cf
 4%

1000
20 yrs 40
8% 4%
40
$791.71
$208.29 ($208.29)
$1,000.00

($686.36)
($142.05)
($828.41)

fv 1000
rate of ret 12% 6%
coupon rate 8% 0.04
couponn payem 40
yr 20 40

pv of c ($601.85)
pv of bond ($97.22)
($699.07)

semi-annual

c 8% 0.04
yr 20 40
principal (let) 1000
coupon payment 40

r 10% 0.05

₹ 828.41

D1 2
div growth rate 5%
r 12%

P0 28.57142857
D0 1.904761905
D11 3.257789254 OR 3.2577892536

P10 46.53984648

d1 2.36 d0 2.325123
cost of capital 7.50%
g 1.50%
P0 39.333333333

A B

FV 1000 1000

time 20 yrs 10 yrs

coupon rate 10% 10%

 Coupon p 100 100

PV COUPON $851.36 $614.46

PV OF INVESTM $148.64 $385.54
$1,000.00 $1,000.00

$1,000.00 $1,000.00

fv 1000
COUPON Payme 80
life 20 years
interest rate 8%
ytm 6.224%
b ytm 8.771%

roe 14%
earnings 20 $million
Retained earnin 12
RETENTION Rati 60%
GROWTH RATE 8.400%
next year earnin 21.68

P0 20
div1 1
dividend yield 5%
p1 22
capital gane rat 10%
cost of capital 15%

15%
d1 0.88
po 22 P1 23.54
dividend yield 4%
capital rate 7%
equity cost of ca 11%

d0 2
cost of capital 15%
p0=share price 13.33333333

dividend yield 1.50% div1/p0

cost of capit 8% r
capital rate 6.500%

D0 2.25 div 1 2.4075

g 7%
RRR 16%
po 26.75

d0 6
g 4%
p0 62
d1 6.24
dividend yield 0.100645161
rrr 14%
 beta 1.3
equity 100%
risk-free rate 7% rf
market-risk pr 9.50% rm
return on equity 19.3500%

debt 1
equity 4
value 5
b of common stock 1.15

COST OF debt 0.3 30%

market-risk premium 10%
risk-free rate 6%
c tax 35%

cost of equity 17.500%

Wacc 18%

corporate tax 40% SHARES NO.

no. of shares outstanding 20 million PRICE/SHARE
price sold per share 25 FV
total equity 500 $million DEBT PRICE
FV 180 $million
Firms debt 171 rd
cost of debt 10% re
cost of equity 20% t
t value 671 1-t

Wacc 16.43% mv of shares

16.4322%
equity beta 1.29
d 1
e 1
v 2
risk free rate 7% rf
cost of debt 7% rd
corporate tax 0.35
return on market 13%
cost of equity 15%

WACC 9.65% 0.09645

corporate Tax 35%

Initial investment on new projrect -25 $million
d 3
e 4
v 7
cost of equity 15%
cost of debt 9%

WACC 11.08%

0 1 2 3 4 5
-25 7 7 7 7 7
6.3018455405 5.673322459 5.107486 4.5980839613 4.1394878437
25.820225782
₹ 25.82
NPV ₹ 0.82 ₹ 0.82
coupon rate 8% 0.04

semi- annual
p 1000
time 20 yrs 40 coupon price
i 8% 0.04 40
10% 0.05
6% 0.03

price of bond ₹ 1,000.00 or 1000

₹ 828.41 828.4091
₹ 1,231.15

semi-annual
fv 1000
i 12% 0.06
t 20 15
c 8% 0.04
10% 0.05

pv ₹ 699.07 699.0741
₹ 862.35
 nominal int rate if 10% was the effective i

9.762% 0.048809
don’t do this
pv ₹ 846.35
 20
25
180
171 IN MARKETd

10%
20%
40%
60%

500 e