1. Jumbo Transport, an air-cargo company, expects to have earnings per share of $2.00 in the coming year. It decides to retain 10% of these earnings in order to lease new aircraft. The return on this investment will be 25%. If its equity cost of capital is 15%, what is the expected share price of Jumbo Transport?
2. Your company currently has $1,000 par, 5.5 % coupon bonds with 10 years to maturity and a price of $1,086 If you want to issue new 10-year coupon bonds at par, what coupon rate do you need to set? Assume that for both bonds, the next coupon payment is due in exactly six months.