1. (Bond valuation) The 8-year $1,000 par bonds of Vail Inc. pay 11 percent interest. The market’s required yield to maturity on a comparable-risk bond is 7 percent. The current market price for the bond is $1,130.

What is your yield to maturity on the Vail bonds given the current market price of the bonds? (Round to two decimal places.)

What should be the value of the Vail bonds given the yield to maturity on a comparable risk bond? (Round to the nearest cent.)

Should you purchase the bond at the current market price?

 

2. (Annuity interest rate) Your parents just called and would like some advice from you. An insurance agent just called them and offered them the opportunity to purchase an annuity for $14,217.56 that will pay them $2,500 per year for 15 years. They do not have the slightest idea what return they would be making on their investment of $14,217.56. What rate of return would they be earning? (Round to two decimal places.)

 

3. (Calculating rates of return) The common stock of Placo Enterprises had a market price of $8.34 on the day you purchased it just one year ago. During the past year, the stock had paid a dividend of $0.54 and closed at a price of $10.47. What rate of return did you earn on your investment in Placo’s stock? (Round to two decimal places.)

 

4. (Individual or component costs of capital) Compute the cost of capital for the firm for the following:

A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.8 percent. Interest payments are $54.00 and are paid semiannually. The bonds have a current market value of $1,130 and will mature in 10 years. The firm’s marginal tax rate is 34 percent.

A new common stock issue that paid a $1.77 dividend last year. The firm’s dividends are expected to continue to grow at 7.4 percent per year, forever. The price of the firm’s common stock is now $27.61.

A preferred stock that sells for $141, pays a dividend of 9.5 percent, and has a $100 par value.

 

 

5. (Weighted average cost of capital) The target capital structure for QM Industries is 37 percent common stock, 9 percent preferred stock, and 54 percent debt. If the cost of common equity for the firm is 18.6 percent, the cost of preferred stock is 10.6 percent, the before-tax cost of debt is 7.7 percent, and the firm’s tax rate is 35 percent, what is QM’s weighted average cost of capital?

 

6. (Weighted average cost of capital) The target capital structure for Jowers Manufacturing is 52 percent common stock, 12 percent preferred stock, and 36 percent debt. If the cost of common equity for the firm is 20.8 percent, the cost of preferred stock is 12.5 percent, and the before-tax cost of debt is 10.4 percent, what is Jowers’ cost of capital

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