FINC302 Finance 101 Homework 9 Other Instructions: Financial calculators may be used, as well as Excel. 1. A US Treasury bond has a coupon rate of 5.95%, semi-annual coupon payments, face value of...

FINC302
Finance 101
Homework 9
Other Instructions:
Financial calculators may be used, as well as Excel.
1. A US Treasury bond has a coupon rate of 5.95%, semi-annual coupon payments, face value of $1,000, and 22 years to maturity. If current market yields on similar bonds is 4.7%, what is the price of this bond?
ANS-
= Price of bond = Coupon amount*present value annuity factor(r, n) + Redemption amount * present value investment factor(r, n)
= 29.75*PVAF(2.35%,44) + 1000 * PVIF(2.35%, 44)
= 29.35*27.3400+1000*0.3599
= 802.429 + 359.9
= 1162.329
Note-
n (periods) = years *2 22*2 = 44 periods
r (rate) = r/2 4.7%/2 = 2.35%
Coupon amount /2 = 1000*5.95%/2 = 29.75
2. A zero-coupon bond has a current yield of 8%, a face value of $1,000, and 23 years to maturity. What is the price of this bond?
Price of ZCB = Face value*PVIF(r, n)
= 1000 (8%, 23)
= 1000*0.1703
= 170.3152
3. A firm issues a bond today with a face value of $1,000, a 6.25% coupon rate, annual coupon payments, and a term of 18 years. An investor purchases the bond for $1,249. What is the yield to maturity?
Ans-
Yield to Maturity (YTM) = Coupon amount+ (Redemption Amount – Face Value/n)
(Redemption amount + Face value)/2
            =     62.5 + (1249-1000)/18
                    (1249 1000)/2

                            =     6.79 %
4. You are covering Webistics Corp. stock, and have prepared the following estimates of the company’s dividends over the next five years:
Year 1:    $0.95
Year 2:    $1.25
Year 3:    $1.50
Year 4:    $1.72
Year 5:    $1.92
After year 5, you expect dividends to grow at a constant rate of 6%. The required rate of return on equity is 10.3%. What is the value of the stock based on your estimates?
Ans-

    1. Explicit forecast period
    
    
    
    
    
    Year
    Dividends
    Discounting Factor ( DF) @10.3%
    Present Value (II*III)
    Year 1:
    $0.95
    0.9066
    $0.86
    Year 2:
    $1.25
    0.822
    $1.03
    Year 3:
    $1.50
    0.7452
    $1.12
    Year 4:
    $1.72
    0.6756
    $1.16
    Year 5:
    $1.92
    0.6125
    $1.18
    Total
    $5.34
    
    
    
    
    2. Horizon Period
    
    
    
    
    
    
    Dividend For forever
    2.0352
    
    
    
    
    
    Present value of dividend for the infinite period at the end of year 5
    
    
    
    
    
    Dividend/r
    
    
    
    
    
    
    2.0352/0.103
    
    
    
    
    
    
    19.7592
    
    
    
    
    
    
    Present value of dividend for the infinite period at the end of year 0
    
    
    
    
    =
    19.7592 * PVIF (r ,n )
    
    
    
    
    
    =
    19.7592 * PVIF (10.3%, 5 )
    
    
    
    
    
    =
    19.7592 * 0.6125
    
    
    
    
    
    =
    12.10251
    
    
    
    
    
    
    
    
    
    
     value of the stock =
    1 + 2
    
    
    
    5.35+12.10
    
    
    =
    $17.45
    
    
    
    
    
5. VR Technologies, Inc. just paid a dividend of $0.75. You expect dividends to grow at a 20% rate for the next two years, and then grow at a rate of 10% for the next three years. After that, you expect dividends to grow at 6% for the foreseeable future. The industry average required rate of return on equity is 9.45%. What value would you place on VR Technologies stock today?
ANS-
    1. Explicit forecast period
    
    
    
    
    
    
    
    
    
    Year
    Dividends
    Growth %
    Dividend for the year
    Discounting Factor ( DF) @9.45%
    Present Value (II*III)
    Year 1:
    $0.75
    20%
    0.90
    0.9137
    $0.69
    Year...