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P6-10 Charter Corp.
P6-10 Charter Corp.
The bonds have a couponinterest rate of 7%.a. What dollar amount of interest per bond can an investor expect to receive eachyear from Charter?b. What is Charter’s total interest expense per year associated with this bond issue?c. Assuming that Charter is in a 35% corporate tax bracket, what is the company’snet after-tax interest cost associated with this bond issue?
P6-11Assume that the Financial Management Corporation’s$1,000-par-value bond had a 5.700% coupon, matured on May 15, 2020, had acurrent price quote of 97.708, and had a yield to maturity (YTM) of 6.034%. Giventhis information, answer the following questions:a. What was the dollar price of the bond?b. What is the bond’s current yield?c. Is the bond selling at par, at a discount, or at a premium? Why?d. Compare the bond’s current yield calculated in part b to its YTM and explainwhy they differ.
P6-15Complex Systems has an outstanding issue of $1,000-parvaluebonds with a 12% coupon interest rate. The issue pays interest annually andhas 16 years remaining to its maturity date.a. If bonds of similar risk are currently earning a 10% rate of return, how muchshould the Complex Systems bond sell for today?b. Describe the two possible reasons why the rate on similar-risk bonds is below thecoupon interest rate on the Complex Systems bond.c. If the required return were at 12% instead of 10%, what would the current valueof Complex Systems’ bond be? Contrast this finding with your findings in part aand discuss.
P6-16 Calculate the value of each of the bonds shown in the following table, all of which pay interest annually.
| Bond | Par Value | Coupon Int Rate | Years to Maturity | Required Return | ||||
| A | $1,000 | 14.00% | 20 | 12.00% | ||||
| B | $1,000 | 8.00% | 16 | 8.00% | ||||
| C | $100 | 10.00% | 8 | 13.00% | ||||
| D | $500 | 16.00% | 13 | 18.00% | ||||
| E | $1,000 | 12.00% | 10 | 10.00% | ||||
P6-22 Each of the bonds shown in the following table pays interest annually.
| Bond | Par Value | Coupon Int Rate | Years to Maturity | Current Value | ||||
| A | $1,000 | 9.00% | 8 | $820.00 | ||||
| B | $1,000 | 12.00% | 16 | $1,000.00 | ||||
| C | $500 | 12.00% | 12 | $560.00 | ||||
| D | $1,000 | 15.00% | 10 | $1,120.00 | ||||
| E | $1,000 | 5.00% | 3 | $900.00 | ||||
a. Calculate the yield to maturity (YTM) for each bond.b. What relationship exists between the coupon interest rate and yield to maturityand the par value and market value of a bond? Explain.
P7-3 In each case in the following table, how many dollars of preferred dividends per share must be paid to preferred stockholders in the current period before common stock dividends are paid?
| Div per period | Per div passed | |||
| Case | Type | Par Value | ||
| A | Cumulative | $80.00 | $5 | 2 |
| B | Noncumulative | $110.00 | 8% | 3 |
| C | Noncumulative | $100.00 | 11% | 1 |
| D | Cumulative | $60.00 | 8.50% | 4 |
| E | Cumulative | $90.00 | 9% | 0 |
P7-4 Valerian Corp. convertible preferred stock has a fixed conversion ratio of 5 common shares per 1 share of preferred stock. The preferredstock pays a dividend of $10.00 per share per year. The common stock currentlysells for $20.00 per share and pays a dividend of $1.00 per share per year.a. Judging on the basis of the conversion ratio and the price of the common shares,what is the current conversion value of each preferred share?b. If the preferred shares are selling at $96.00 each, should an investor convert thepreferred shares to common shares?c. What factors might cause an investor not to convert from preferred to commonstock?
P7-8 Use the constant-growth model (Gordon growth model) to find the value of each firm shown in the following table.
| Firm | Dividend next year | Dividend growth rate | Required return | |||
| A | $1.20 | 8% | 13% | |||
| B | $4.00 | 5% | 15% | |||
| C | $0.65 | 10% | 14% | |||
| D | $6.00 | 8% | 9% | |||
| E | $2.25 | 8% | 20% | |||
P7-11Newman Manufacturing is considering acash purchase of the stock of Grips Tool. During the year just completed, Gripsearned $4.25 per share and paid cash dividends of $2.55 per share .Grips’ earnings and dividends are expected to grow at 25% per year for thenext 3 years, after which they are expected to grow at 10% per year to infinity.What is the maximum price per share that Newman should pay for Grips if ithas a required return of 15% on investments with risk characteristics similar tothose of Grips?
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