Prob 21

Kverneland Group has bonds on the market

with 14.5 years to maturity, a yield to maturity
of 6.1 percent, and a current price of 1,038kr.
The bonds make semiannual payments. What
must the coupon rate be on these bonds?
answer:
0.0650

prob 25

Deutsche Bank issued 20-year bonds two years

ago at a coupon rate of 7.1 percent. The bonds
which has a face value of €100 make
semiannual payments. If these bonds currently
sell for 106 percent of par value, what is the
yield to maturity?
answer:
0.0653

prob 24

Samyang Food has outstanding bonds with

₩10,000 face value that pay an annual coupon
rate of interest of 10.5 percent. The bonds are
scheduled to mature in 20 years. Because of
Samyang’s increased risk, investors now require
a 14 percent rate of return on bonds of similar
quality with 20 years remaining until maturity.
The bonds are callable at 110 percent of par at
the end of 10 years. What price would the
bonds sell for assuming investors expect them
to be called at the end of 10 years?
answer:
(₱7,027.05)

prob 29
Monde Nissin stock currently sells for ₱64.87
per share. The market requires a return of 11
percent on the firm’s stock. If the company
maintains a constant 6 percent growth rate in
dividends, what was the most recent dividend
per share paid on the stock?
answer:

68.7622 64.93

1375.244 1298.6
Example: If the last dividend is $2 and the expected growth rate is 5%, what is
D1? D5?

D1 = $2(1 + 0.05) = $2.10

D5 = $2(1 + 0.05)5 = $2.55

It can be shown algebraically that, as long as r is greater than g, the present

value of an infinite stream of cash flows which are changing at constant rate is
equal to

P0 = (D0 x (1 + g)) / (r – g) = D1 / (r – g).

Example: Consider the stock given above. If the required return is 10%, what
is the expected price today? In 4 years?

P0 = 2.10 / (0.1 – 0.05) = $42

P4 = 2.55 / (0.1 – 0.05) = $51