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Chapter 5 – Question 1- 40 points
1. Zang international Chinese chemical company has a 15% annual coupon interest rate on a \$1,000 par value bond with 20 years left to maturity. Bonds of same maturity now sell to yield 11% return.

How much would you be willing to pay for one of these bonds today? Why?
If the bond is selling for \$ 1,141 what is the yield to maturity?
Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par value?
Chapter 6 (Stocks) – Question 2 – 60 points

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2a. John’s company’s just paid a dividend of \$2.40 per share on its stock and the dividends are expected to grow at a constant rate of 5% per year. If the required rate of return on this stock is 12%, what is value of this stock?

2b. Thomas Brothers stock is selling for \$6.25 per share and it is expected to pay a \$.50 per share dividend at the end of the year. The dividend of the stock is expected to grow at a constant rate of 7% per year. What is expected rate of return on the stock ?

2c. Johnson Manufacturing is expected to pay a dividend of \$1.25 per share at the end of the year (D1 = \$1.25). The stock sells for \$32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

Chapter 5 – Question 1-  40 points

1.  Zang international Chinese chemical company has a 15% annual coupon interest rate on a \$1,000 par value bond with 20 years left to maturity.  Bonds of same maturity now sell to yield 11% return.
• How much would you be willing to pay for one of these bonds today?  Why?
• If the bond is selling for \$ 1,141 what is the yield to maturity?
• Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds?  What about for discount bonds? For bonds selling at par value?

Chapter 6 (Stocks) – Question 2 – 60 points

2a. John’s company’s just paid a dividend of \$2.40 per share on its stock and the dividends are expected to grow at a constant rate of 5% per year. If the required rate of return on this stock is 12%, what is value of this stock?

2b.  Thomas Brothers stock is selling for  \$6.25 per share and it is expected to pay a \$.50 per share dividend at the end of the year. The dividend of the stock is expected to grow at a constant rate of 7% per year.  What is expected rate of return on the stock ?

2c. Johnson Manufacturing is expected to pay a dividend of \$1.25 per share at the end of the year (D1 = \$1.25). The stock sells for \$32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever.  What is the equilibrium expected growth rate?

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