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ASSIGNMENT 4
Beyza Gül TUTAR
1) Lydic Corporation has bonds on the market with 12.5 years to maturity, a Yield to Maturity
(YTM) of 6.4 percent, a par value of $1,000, and a current price of $1,040. The bonds make
semiannual payments. What must the coupon rate be on these bonds?
Par value of bond (FV) 1,000$
Current Price of Bond (PV) 1,040$
12.5 year. Semiannualy. So, 25 semiannual. Number of semiannual (N) is 25.
Annual yield to maturity 6.4% so, semiannual yield to maturity is 6.4%/2= 3.20%
I used financial calculator
PMT semiannual coupon payment value for
semiannual period is 35.35$
Annual cupon rate on bond is calculated:
= (34.35$ x 2)/1,000
=6.87%
THE coupon rate of bond is 6.87%
2) Mycroft Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.9 percent paid
semiannually and 13 years to maturity. The yield to maturity of the bond is 3.8 percent.
What is the dollar price of the bond?
Price of bond is calculated by discounting the future coupon payment ad par value of bonf at
YTM(market interest rate).
C=Periodic Coupon Payment
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r= discount rate per period
T= number of periods
F= Face value of bond=2000
-Par value of bond=2,000$
Coupon rate= 4.90%
So,
= (2,000$x4.90%)/2
=49$ is semiannual coupon payment
So, Par Value (FV) = 2,000$
Semiannual Coupon Payment (PMT) = 49.00$
13 year or 26 semiannual
Annual Yield to Maturity= 3.80%
That’s why, Semiannual Yield to maturity is 1.90%
Now:
= ($49 x20.367623)+$1,226.03
=$2,224.04
SO, the price of bond on this year is 2,224.04$
3) The Faulk Corp. has a bond with a coupon rate of 5.7 percent outstanding. The Gonas
Company has a bond with a coupon rate of 12.3 percent outstanding. Both bonds have 14
years to maturity, make semmianual payments, and have a YTM of 9 percent. If interest
rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? What
if interest rates suddenly fall by 2 percent instead? What does this problem tell you about the
interest rate risk of lower coupon bonds?
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Price of bond of FC can be calculated:
t is 28 semi-annual payments and T is 14 years
=74.79$ is the price of bond of FC
Price of GC
=126.7$
So, price of FC is 74.79$ and price of GC 126.7$. If there is an increse in
interest rate by 2%, ytm will become 11%
So,
=40.25+23.2
=63.45$
Price for GC; same formula..
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=110,05$
Price of FC is 63.45$ and price of GC is 110.05$.
SO, percentage increase in price of GC is (new p – old p)/old p *100
= -13.14%
SO, percentage increase in price of FC is (new p – old p)/old p *100
=-15.16%
percentage increase in price of FC is -15.16% percentage increase in price of GC is 13.14%.
If interest rate falls by 2% ytm will become 5%
Price of FC
Same formula.. price= …
=80.1$
Price for GC
Same formula.. price=..
=173.28$
Price of FC is 80$ Price for GC is 173.28$
Percentage increase in price of FC is 7.1%
Percentage increase in price of FC is 36.76%
Finally, so, fluctuation in the price of FC is 7less than GC. Thats why bonds with higher
coupon payments get more affected with change in interest rate as compared to low coupon
bonds.
4) Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual
fee of $800 and has an existing customer base of 525. Paul plans to raise the annual fee by 6
percent every year and expects the club membership to grow at a constant rate of 3 percent for
the next five years. The overall expenses of running the health club are $80,000 per year and
are expected to grow at the inflation rate of 2 percent annually. After five years, Paul plans to
buy a luxury boat for $400,000, close the health club, and travel the world in his boat for the
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rest of his life. What is the annual amount that Paul can spend while on his world tour if he will
have no money left in the bank when he dies? Assume Paul has a remaining life of 25 years and
earns 9 percent on his savings.
Used Excel file.
5 years later PA has 2,740,599.77$
And, annual amount that can be withdrawn for 25 years
So, PA can spend 238,287.69$ for 25 years.
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5) Cuban Corp. will pay a dividend of $3.08 per share next year. The company pledges to increase
its dividend by 4.6 percent per year indefinitely. If you require a return of 11 percent on your
investment, how much will you pay for the company’s stock today?
Constant Growth. Formula of dividend discount model
P0= Current stock price
Div1= Expected dividend in year 1 = 3.08$
R= Required rate of return 11%
g=dividend growth rate 4.60%
So, the current stock price of Cuban Corporation is 48.13$
6) Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.86 next year. The
growth rate in dividends for all three companies is 5 percent. The required return for each
company’s stock is 8 percent, 11 percent, and 14 percent, respectively. What is the stock price
for each company? What do you conclude about the relationship between the required return
and the stock price?
Formula of dividend discount model to find current stock price of Red inc
P0= Current stock price
Div1= Expected dividend in year 1 = 2.86$
R= Required rate of return 8%
g=dividend growth rate 5%
current stock price of Red inc is 95.33$
Formula of dividend discount model to find current stock price of Yellow inc
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P0= Current stock price
Div1= Expected dividend in year 1 = 2.86$
R= Required rate of return 11%
g=dividend growth rate 5%
current stock price of Red inc is 47.67$
Formula of dividend discount model to find current stock price of Yellow inc
P0= Current stock price
Div1= Expected dividend in year 1 = 2.86$
R= Required rate of return 14%
g=dividend growth rate 5%
= current stock price of Red inc is 31.78$
Tehre is a inverse relation between required rate of return and price of stock. When rewuired
rate of return increases, stock price of company decreases.
7) Upton Co. is growing quickly. Dividends are expected to grow at 27 percent for the next three
years, with the growth rate falling off to a constant 4.5 percent thereafter. If the required return
is 10.4 percent and the company just paid a dividend of $2.65, what is the current share price?
8) Ramsay Corp. currently has an EPS of $3.83, and the benchmark PE for the company is 19.
Earnings are expected to grow at 6.5 percent per year. What is your estimate of the current stock
price? What is the target stock price in one year?
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So, the estimate price of stock is 72.77
So, the eps of the next year is 4.08$
So, the estimate price of stock is 77.52
Return on the stock
So, the implies return on stock is 6.5%
İmplied return on stock is equal to growth rate of EPS. Return on stock would allways be
equal to the growth rate if the no dividend is paid and PE ratio is constant during the period.
9) Lotharan Corp. has yearly sales of $31.5 million and costs of $17.3 million. The company’s
balance sheet shows debt of $59 million and cash of $21 million. There are 975,000 shares
outstanding, and the industry EV/EBITDA multiple is 7.5. What is the company’s enterprise
value? What is the stock price per share?
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