11.2 Twin Oaks Health Center has a bond issue outstanding with a coupon rate of 7 percent and four years remaining until maturity. The par value of the bond is $1000, and the bond pays interest annually
11.2 Twin Oaks Health Center has a bond issue outstanding with a coupon rate of 7 percent and four years remaining until maturity. The par value of the bond is $1000, and the bond pays interest annually.
a. Determine the current value of the bond if present market conditions justify a 14 percent required rate of return.
b. Now suppose Twin Oaks’ four-year bond had semiannual coupon payments. What would be its current value? (Assume a 7 percent semiannual required rate of return. However, the actual rate would be slightly less than 7 percent because a semiannual coupon bond is slightly less risky than an annual coupon bond.)
c. Assume that Twin Oaks’ four-year bond had a semiannual coupon but 20 years remaining to maturity. What is the current value under these conditions? (Again, assume a 7 percent semiannual required rate of return, although the actual rate would probably be greater than 7 percent because of increased price risk.)
12.3 A broker offers to sell you shares of Bay Area Healthcare, which just paid a dividend of $2 per share.
The dividend is expected to grow at a constant rate of 5 percent per year. The stock’s required rate of return is 12 percent.
a. What is the expected dollar dividend over the next three years?
b. What is the current value of the stock and the expected stock price at the end of each of the next three years?
c.What is the expected dividend yield and capital gains yield for each of the next three years?
d. what is the expected total return for each of the next three years?
e. how does the expected total return compare with the required rate of return on the stock? does this make sense? explain your answer.
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