Please record your answers and calculations in the spaces provided. Show your calculations to eligible for partial credit. Round to two decimal places in your final answers, where applicable.
Be sure to use appropriate units, such as $ or %, in you final answers, when applicable; failure to do so will result in a 0.50-point reduction per missing unit.
1. A corporate bond has a par value of $1,000, a coupon rate of 7.32% and its price is 101.36% of its par value. It will mature in 2032.
a. What is the current market price for the bond?
b. Is this a premium bond or a discount bond? Why?
c. How many years until the bond matures?
d. What is the annual dollar coupon amount for the bond?
e. What is the current yield for the bond? What does it measure?
f. Based on the above information, what is the bond's yield to maturity?
g. What does the yield to maturity measure?
h. Based on the above information, what is the value of the bond, assuming a required rate of return of 8.8%?
i. Suppose you want to invest in the bond. Should you purchase the bond given the price for the bond in a. and your answer in h.? Explain.
2. You bought a stock for $44.65 per share and sold it for $48.26 per share a year later. During the year, the stock paid a dividend of $0.95 per share. What is the dividend yield, capital gains yield and total return for this stock for the year?
3. Suppose Big D, Inc. just paid a dividend of $4.50. It is expected to increase its dividend by 6% per year.
a. If the market requires a return of 15% on assets of this risk, how much should the stock be selling for?
b. If the stock can be bought on the market for $50.90, should you buy it? Explain.
4. Hi-Tech, Inc. uses the industry PE ratio as its benchmark. The industry PE ratio is currently 14.4 and Hi-Tech, Inc. expects its earnings per share to be $3.26 next year.
a. What should Hi-Tech, Inc.'s stock be selling for today?
b. If you can buy Hi-Tech, Inc.'s stock for $42.98, should you buy it? Explain.