1. a. Microhard has issued a bond with the following characteristics: Par: $1,00
ID: 2633466 • Letter: 1
Question
1. a. Microhard has issued a bond with the following characteristics:
Par: $1,000
Time to maturity: 10 years
Coupon Rate: 8 percent
Annual payments
Calculate the price of this bond if the YTM is 6 percent.
b. Assume one year after the bond is issued, the market rate moves to 8 percent. What is the new price of the bond and what rate of return would an investor who bought the bond when it was originally issued and sold the bond at its market price at the end of one year?
2.In order to buy back its own shares, Pennzoil Co. has decided to suspend its dividends for the next two years. It will resume its annual cash dividend of $2.00 in year 3 and year 4. Thereafter, its dividend payments will grow at an annual growth rate of 6 percent, forever. The required rate of return on Pennzoil
Explanation / Answer
1)a Price of the bond = 80*(1-(1+6%)^(-10))/6%+1000/(1+6%)^10
=$1147.20
b) Price of the bond after one year = 80*(1-(1+8%)^(-9))/8%+1000/(1+8%)^9
=$1000
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2) D1 = $0
D2 =$0
D3 = $2
D4 = $2
D5 = 2*(1+6%) = $2.12
Price = 0+0+2/(1+16%)^3+2/(1+16%)^4+(2.12/(16%-6%))/(1+16%)^4
=$14.09
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3 ROE = 11%
Dividened Payout Ratio = 25%
Sustainable growth rate = 11%*(1-25%)/(1-11%(1-25%))
=8.99%
Required Rate of Return:
Dividened per share = 10000000*25%/1250000
=$2
=> 40 = 2*(1+8.99%)/(Ke-8.99%)
=> Ke = 2*(1+8.99%)/40+8.99%
=14.44%
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