Compute the bonds expected rate of return.

| June 10, 2016

Question
Question 1 (Bond valuation) you own a 10 year, $1,000 par value bond paying 7.5 percent
interest annually. The market price of the bond is $950, and your required rate of return is 10
percent.
a. Compute the bonds expected rate of return.
b. Determine the value of the bond to you, given your required rate of return.
c. Should you sell the bond or continue to own it?

Question 2 (Bond valuation) National Steel 20 year, $1,000 par value bonds pay 9 percent
interest annually. The market price of the bonds is $800, and your required rate of return is 13
percent.
a. Compute the bonds expected rate of return.
b. Determine the value of the bond to you, given your required rate of return.
c. Should you purchase the bond?

Question 3 (Bondholders expected rate of return) The market price is $1,000 for a 16 year
bond (1,000 par value) that pays 9 percent interest (4.5 percent semiannually) What is the bonds
expected rate of return?
Question 4 (Expected rate of return and current yield) Citigroup issued bonds that pay a
coupon interest rate of 8.5 percent. The bonds mature in 14 years. They are selling for $866.
What would be your expected rate of return (yield to maturity) if you bought the bonds? What
would the current yield be?
Question 5 (Yield to maturity) A 13 year bond for Katy Corporation has a market price of $
750 and a par value of $1,000. If the bond has an annual interest rate of 11 percent, but pays
interest semiannually. What is the bond yield to maturity?
Question 6 (Preferred stock value) what is the value of a preferred stock when the dividend
rate is 13 percent on a $125 par value? The appropriate discount rate for a stock of this risk level
is 10 percent.
Question 7 (Common stock valuation) Dalton Inc. has a return on equity of 10.7 percent and
retains 52 percent of its earnings for reinvestment purposes. It recently paid a dividend of $2.75
and the stock is currently selling for $38.

a. What is the growth rate for Dalton Inc?
b. What is the expected return for Daltons stock?
c. If you require a 14 percent return, should you invest in the firm?

Question 8 (Measuring growth) Given that a firms return on equity is 19 percent and
management plans to retain 42 percent of earning for investment purposes, What will be the
firms growth rate?
Question 9 (Preferred stockholder expected return) You own 150 shares of Dalton Resources
preferred stock, which currently sells for $41.84 per share and pays annual dividends of $3.50
per share?
Question 10 (Common stockholder expected return) Blackburn & Smith common
stock currently sells for $ 24.50 per share. The companys executives anticipate a
constant growth rate of 8.5 percent and end of year dividend of $1.75.
What is your expected rate of return?
If you require a return of 19 percent, should you purchase the stock?

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