5.

1
a. $613.91; b. $385.54; C. $247.18
5.2
The amount of the semi-annual interest payment is $40 (=$1,000*0.08/2). There are a total of 40 periods;
i.e., two half years in each of the twenty years in the term to maturity. The annuity factor tables can be used
to price these bonds. The appropriate discount rate to use is the semi-annual rate. That rate is simply the
annual rate divided by two. Thus, for part b, the rate to use is 5% and for part c, use 3%.
a. $40(19.7928)+$1,000/1.0440 = $1,000. Whenever the coupon rate and the market rate are the
same, the bond is priced at par.
b. $40(17.1591) + $1,000/1.0540 = $828.41. Whenever the coupon rate is below the market rate, the
bond is priced below par.
c. $40(23.1148) + $1,000/1.0340 = $1,231.15. Whenever the coupon rate is above the market rate,
the bond is priced above par.
5.3 Semi-annual discount factor = (1.12)1/2-1=0.0583=5.83%
a. Price = $718.65;
b. Price = $883.64;
5.4 Effective annual rate of 10%: Semi-annual discount factor = (1.1)0.5-1=0.04881=4.881%.
Price = $846.33
5.5 C=$45; The annual coupon rate = $45*2/$1,000 = 0.09=9%
5.6
a. The semi-annual interest rate is $60/$1,000=0.06. Thus, the effective annual rate is 1.062 1 =
0.1236 = 12.36%. Since the bond is selling at par, the coupon rate = the yield to maturity.
b. Price = $748.48 (n=12, I=6%, PMT=30, FV=1000)
c. Price = $906.15 (n=12, I=4%, PMT = 30, FV=1000)
In parts b and c we are implicitly assuming that the yield curve is flat. That is, the yield in year 5 applies
for year 6 as well.
5.7
a. PA=$1,000; PB = $1,000
b. PA =$850.61; PB=$887.00
c. PA =$1,196.36; PB=$1,134.20
5.9
a. PV = 1200, PMT=80, n = 20,FV=1000, Compute I = 6.22%.
b. PV=950,PMT=80,n=10,FV=1000, Compute I = 8.77%.
5.10 PA = $18,033.86 PB=$3,888.89
5.11
a. True b. True c. True d. False e. True
5.12
a. True b. False c. True d. True
5.13 Price = $28.89
5.14
a. True b. False c. True d. True
5.15 98.125=1.30(1.07)/r=0.07; r=8.4175%
5.16 Price = $36.31; The number you own = $100,000/$36.31=2,754 shares.
5.17
a. P=$28.57
b. P10=D11/(r-g) = $2(1.05)2/(0.12-0.05)=$46.54
5.18 Price = $26.95
5.19 Dividend one year from now = $5(1-0.10)=$4.50
Price = $5 +$4.50/{0.14-(-0.10)}=$23.75
Since the current $5 dividend has not yet been paid, it is still included in the stock price.
5.20 Price =$47.62
5.21 Price = 1.40(1.05)(0.10-0.05)=$29.40
5.22 Price = 2/(1.16)3+2/(1.16)4+2.12/(0.16-0.06)/ (1.16)4 = 1.28+1.10+11.71=$14.09
5.23 $71.70
5.24 30=D/1.12+D/(1.122)+{D(1+0.04)/(0.12-0.04)}/1.122 = 12.053571D; D=$2.49
5.25 Growth rate g = 0.6*0.14=0.084=8.4%. Next year earnings=$20 million * 1.084=$21.68
5.26 g=retention ratio * ROE = 0.75*0.12=0.09=9%
Dividend per share = $10 million*(1-0.75)/1.25 million = $2
The required rate of return = $2(1.09)/$30+0.09=.1627=16.27%
5.27 $4.82
5.28
a. Price = $15.75; b. NPVGO=$15,434.783. The price increases by $15.43 per shr.
5.29
a. Price=EPS/r={$100 million/20 million}/0.15=$33.33
b. NPV=-$15 million-$5 million/1.15 +($10 million/0.15)/1.15=$38,623,188
c. Price=$33.33+$38,623,188/20,000,000=$35.26