Problem 1: The Altoona Company issued a 25-year bond 5 years ago with a face value of $1,000. The bond pays interest semiannually at a 10% annual rate.
a. What is the bond's price today if the interest rate on comparable new issues is 12%?
b. What is the price today if the interest rate is 8%?
c. What is the price today if the interest rate is 10%?
d. Calculate the current yields for parts a, b, and d.
e. Explain the results of parts a and b in terms of opportunities available to investors.
Problem 2: The Pancake Corporation recently paid a $3 dividend, and is expected to grow at 5% forever. Investors generally require an expected return of at least 9% before they'll buy stocks similar to Pancake.
a. What is Pancake's intrinsic value?
b. Is it a bargain if it's selling at $76 a share?