Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The
bonds will mature in 25 years. Compute the current price of the bonds if the
present yield to maturity is:
a. 7 percent.
b. 10 percent.
c. 13 percent.
7. Go to Table 10–1 which is based on bonds paying 10 percent interest for
20 years. Assume interest rates in the market (yield to maturity) decline from
11 percent to 8 percent:
a. What is the bond price at 11 percent?
b. What is the bond price at 8 percent?
c. What would be your percentage return on investment if you bought when
rates were 11 percent and sold when rates were 8 percent?
19. North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed
dividend of $6 per share. With the passage of time, yields have soared from the
original 6 percent to 14 percent (yield is the same as required rate of return).
a. What was the original issue price?
b. What is the current value of this preferred stock?
c. If the yield on the Standard & Poor’s Preferred Stock Index declines, how
will the price of the preferred stock be affected?
21. Analogue Technology has preferred stock outstanding that pays a $9 annual
dividend. It has a price of $76. What is the required rate of return (yield) on the
preferred stock?
24. Friedman Steel Company will pay a dividend of $1.50 per share in the next
12 months (D1). The required rate of return (Ke) is 10 percent and the constant
growth rate is 5 percent.
a. Compute P0.
(For parts b, c, and d in this problem all variables remain the same except the one
specifically changed. Each question is independent of the others.)
b. Assume Ke, the required rate of return, goes up to 12 percent; what will be
the new value of P0?
c. Assume the growth rate (g) goes up to 7 percent; what will be the new
value of P0?
d. Assume D1 is $2, what will be the new value of P0?
27. A firm pays a $4.90 dividend at the end of year one (D1), has a stock price of
$70, and a constant growth rate (g) of 6 percent. Compute the required rate of
return.
