Chapter 3

1. Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a
yield to maturity of 7.68 percent. The bonds mature in 6 years. What is the
market price per bond if the face value is $1,000?
2. Roadside Markets has a 6.75 percent coupon bond outstanding that matures in
10.5 years. The bond pays interest semiannually. What is the market price per
bond if the face value is $1,000 and the yield to maturity is 6.69 percent?
3. A 16-year, 4.5 percent coupon bond pays interest annually. The bond has a face
value of $1,000. What is the percentage change in the price of this bond if the
market yield to maturity rises to 5.7 percent from the current rate of 5.5
percent?
4. The Corner Grocer has a 7-year, 6 percent annual coupon bond outstanding with
a $1,000 par value. The bond has a yield to maturity of 5.5 percent. What is the
percentage change in the price of this bond if the market yield to maturity rises to
6.5 percent? Which one of the following statements is correct if the market yield
suddenly increases to 6.5 percent?
5. Blackwell bonds have a face value of $1,000 and are currently quoted at 98.4. The
bonds have a 5 percent coupon rate. What is the current yield on these bonds?
6. The outstanding bonds of The River Front Ferry carry a 6.5 percent coupon. The
bonds have a face value of $1,000 and are currently quoted at 101.6. What is the
current yield on these bonds?
7. Northern Warehouses wants to raise $11.4 million to expand its business. To
accomplish this, it plans to sell 40-year, $1,000 face value, zero-coupon bonds.
The bonds will be priced to yield 8.75 percent. What is the minimum number of
bonds it must sell to raise the $11.4 million it needs?
8. You have won a contest and will receive $2,500 a year in real terms for the next 3
years. Each payment will be received at the end of the period with the first
payment occurring one year from today. The relevant nominal discount rate is
6.3 percent and the inflation rate is 4.5 percent. What are your winnings worth
today?
9. You purchased an investment which will pay you $8,000, in real dollars, a year
for the next three years. Each payment will be received at the end of the period
with the first payment occurring one year from today. The nominal discount rate
is 7.5 percent and the inflation rate is 2.9 percent. What is the present value of
these payments?
10. Technical Sales, Inc. has 6.6 percent coupon bonds on the market with 9
years left to maturity. The bonds make semiannual payments and currently sell
for 88.79 percent of par. What is the effective annual yield?
 Chapter 4

1. Upper Crust Bakers just paid an annual dividend of $2.80 a share and is expected
to increase that amount by 4 percent per year. If you are planning to buy 1,000
shares of this stock next year, how much should you expect to pay per share if the
market rate of return for this type of security is 11.50 percent at the time of your
purchase?
2. Show Boat Dinner Theatres has paid annual dividends of $0.32, $0.48, and $0.60
a share over the past three years, respectively. The company now predicts that it
will maintain a constant dividend since its business has leveled off and sales are
expected to remain relatively flat. Given the lack of future growth, you will only
buy this stock if you can earn at least a 16 percent rate of return. What is the
maximum amount you are willing to pay for one share of this stock today?
3. The common stock of Auto Deliveries sells for $28.16 a share. The stock is
expected to pay $1.35 per share next year when the annual dividend is
distributed. The firm has established a pattern of increasing its dividends by 3
percent annually and expects to continue doing so. What is the market rate of
return on this stock?
4. The current dividend yield on Clayton's Metals common stock is 2.5 percent. The
company just paid a $1.48 annual dividend and announced plans to pay $1.54
next year. The dividend growth rate is expected to remain constant at the current
level. What is the required rate of return on this stock?
5. Combined Communications is a new firm in a rapidly growing industry. The
company is planning on increasing its annual dividend by 15 percent a year for
the next 4 years and then decreasing the growth rate to 3.5 percent per year. The
company just paid its annual dividend in the amount of $0.20 per share. What is
the current value of one share of this stock if the required rate of return is 15.5
percent?
6. KL Airlines paid an annual dividend of $1.42 a share last month. The company is
planning on paying $1.50, $1.75, and $1.80 a share over the next 3 years,
respectively. After that, the dividend will be constant at $2 per share per year.
What is the market price of this stock if the market rate of return is 10.5 percent?
7. Diets For You announced today that it will begin paying annual dividends next
year. The first dividend will be $0.12 a share. The following dividends will be
$0.15, $0.20, $0.50, and $0.60 a share annually for the following 4 years,
respectively. After that, dividends are projected to increase by 4 percent per year.
How much are you willing to pay to buy one share of this stock today if your
desired rate of return is 8.5 percent?
8. Beatrice Markets is expecting a period of intense growth and has decided to
retain more of its earnings to help finance that growth. As a result, it is going to
reduce its annual dividend by 30 percent a year for the next 2 years. After that, it
will maintain a constant dividend of $2.50 a share. Last year, the company paid
$3.60 as the annual dividend per share. What is the market value of this stock if
the required rate of return is 14.5 percent?
9. Consider the following three stocks;
 Stock A is expected to provide a dividend of $10 a share forever.
 Stock B is expected to pay $5 dividend next year. Thereafter, dividend growth is
expected to be 4% a year forever.
 Stock C is expected to pay $5 dividend next year. Thereafter, dividend growth is
expected to be 20% a year for five years (years 2 through 6) and zero thereafter.
If the market capitalization rate is 10%, which stock is the most valuable?