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# 26. Mercier Corporations stock is selling for \$95. It has just paid a dividend of \$5 a share.

The expected rate in dividend is 8percent. a. what is the required rate of return on this stock? b. using your answer to a suppose Mercier announces developments that should lead to dividend increases of 10 percent annually. What will be the new value of Merciers stock? c. Again using your answer to a suppose developments occur that leave investors expecting that dividends will not change from their current levels in the foreseeable future. Now what will be the value of Mercier stock? d. From your answers to b c; how important are investors expectations of future dividend growths to the current stock price a. R = next div / stock price + Growth rate, or R = 5.40 / 95 + 8% = 13.7% b. Price = Next div / R - G, or 5.50 / (13.7 - 10.0) = 148.65 c. With a Constant Div, zero growth, Price = Next div / R So Price = 5 /13.7% = 36.5 d.

6. The Garcia Companys bonds have a face value of \$1000 will mature in ten years and carry a coupon rate of 16%. Assume interest payments are made semi-annually. a. Determine the present value of the bonds cash flows if the required rate of return is 16.64 percent. b. how would your answer change if the required rate of return is 12.36%?

4. Assume a \$1000 face value bond has a coupon rate of 8.5 percent pay interest semi-annually and has an eight-year life. If investors are willing to accept a 10.25 percent rate of return on bonds of similar quality what is the present value or worth of this bond?

Given face value =\$1000 n =8 years market rate of interest = 10.25%. Coupon rate =8.5%

PV of par value = face value/(1+r)n=1000*(1/(1+0.1025)8)=\$458.1 PVIFAkd,n = [1-(1+Kd)-n]/kd= [1-(1+0.1025)-8)/0.1025 =5.287 PV of coupons = \$1000*8.5%*PVIFAkd,n =1000*0.085*5.287 = \$449.4

## Total value of bond = \$458.1+ \$449.4 =\$907.5

2. Judy Jonson is choosing between investing in two Treasury securities that mature in five years and have par values of \$1000. One is a Treasury note paying an annual coupon of 5.06%. The other is a TIPS which pays 3% interest annually. A If inflation remains constant at 2 percent annually over the next five years, what will be Judy's annual interest income from the TIPS bond? From the Treasury note? b. How much interest will Judy receive over the five years from the Treasury note? From the TIPS?

c. When each bond matures, what par value will Judy receive from the Treasury note? The TIPS? d. After five years, what is Judys total income (interest par) from each bond? Should she use this total as a way of deciding which bond to purchase?

a. Judy's annual interest income from the TIPS bond First year: value: 1020 interest 30.6 Second year: value: 1040.4 Third year: Fourth year Fifth year value: 1061.21 value: 1082.43 value: 1104.08 interest: 31.21 interest: 31.84 interest: 32.47 interest: 33.12

Judy's annual interest income from the Treasury note First year: value: 1020 interest 51.61 Second year: value: 1040.4 Third year: value: 1061.21 interest: 52.64 interest: 53.70