5. Stock R has a beta of 1.5, stock S has a beta of 0.75, the required return on

Question

5. Stock R has a beta of 1.5, stock S has a beta of 0.75, the required return on an average stock is

13%, and the risk free rate of return is 7%. By how much does the required return on the riskier

stock (stock R) exceed the required return on the less risky stock (stock S)?

6. 3M Corporation has outstanding an issue of $1000 face value, 8.5% coupon bonds that mature

in 15 years. Today, investors require a 14% rate of return.

a. Calculate the price of these bonds today.

b. Calculate the price of these bonds 5 years from now if market interests do not change.

c. Calculate the price of these bonds 5 years from now if investors’ required rate of returndeclines to 11%.

7. Assume you purchase a Procter & Gamble bond at a price of $875, with an outst

anding issue of $1000 face value, 12.64% coupon that matures in 14 years. You hold it for five years, and then sell it for $975. Calculate your holding period yield.

8. Adams Enterprises’ noncallable bonds currently sell for $1,120. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity?

9. Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par

value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 7.0%, at what price should the bonds sell?

10. The stock of the JC Penny Co recently paid an annual dividend of $2.64 per share. The stock

is currently selling at $50 per share. Calculate the stock’s dividend yield, capital gain yield and total return if investors anticipate the company’s dividends will grow for the foreseeable future at 12%

Explanation / Answer

(5)

Required return = Risk-free rate of return + Beta x (Required return on average stock - Risk-free rate of return)

For Stock R,

Required return = 7% + 1.5 x (13 - 7)% = 7% + 1.5 x 6% = 7% + 9% = 16%

For Stock S,

Required return = 7% + 0.75 x (13 - 7)% = 7% + 0.75 x 6% = 7% + 4.5% = 11.5%

Therefore, required return on stock R exceeds the required return on stock S by (16 - 11.5)% = 4.5%.

NOTE: As per Chegg Answering Policy, first question is answered.

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