Corporate Finance Homework2

1、

A. For Bond A, the current price is:

[pic 1]

For Bond A, the current price is:

[pic 2]

B. Since the yield to maturity remains 9%, we can say that during the past year,

[pic 3]

For Bond A, since there is no cash dividend, the current yield and capital gains yield are:

[pic 4]

For Bond B, the cash dividend is $100, so the current yield and capital gains yield are:

[pic 5]

[pic 6]

C. For Bond A, at the end of year, the price will be:

[pic 7]

Thus, the ROR over the year will be:

[pic 8]

For Bond B, at the end of year, the price will be:

[pic 9]

Thus, the ROR over the year will be:

[pic 10]

2、

A. If the firm remains to pay out all its earnings as dividends, using the dividend discount model, we can define the price as:

[pic 11]

Thus, Cogent Consultant’s stock price will be $56.4.

B. If the firm remain 60% of its earning, first, we can find the original $8.46 distributed will decline to $8.46*40% every year, the else will generate $8.46*60%*20% every year.

Using NPVGO model, suppose in year i, the dividend distributed is , then, in the next year, the distributed dividend will be:[pic 12]

[pic 13]

Then, we can derivate that the stock price will be:

[pic 14]

Thus, Cogent Consultant’s stock price will be $112.8.

3. Suppose the bid price is P dollar per stamp to keep NPV equals zero. Then, the cash flow during those 7 years can be concluded as the below graph.

Using this graph and EXCEL, we can calculate that: