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    Assignment 4 (Revised) (Answers)

    Uploaded by

    kaank
    The Lydic Corporation bond has a coupon rate of 6.8% based on its yield to maturity of 6.4%, price of $1,040, and par value of $1,000. The Mycroft Corp. bond price is $2,225 with a coupon rate of 4.9% and yield to maturity of 3.8%. The Faulk Corp. bond price is $740.28 with a lower 5.7% coupon rate compared to the Gonas Company bond price of $1,259.83 with a higher 12.3% coupon rate, both with a yield to maturity of 9%.

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    Assignment 4 (Revised) (Answers)

    Uploaded by

    kaank
    56 views3 pages
    The Lydic Corporation bond has a coupon rate of 6.8% based on its yield to maturity of 6.4%, price of $1,040, and par value of $1,000. The Mycroft Corp. bond price is $2,225 with a coupon rate of 4.9% and yield to maturity of 3.8%. The Faulk Corp. bond price is $740.28 with a lower 5.7% coupon rate compared to the Gonas Company bond price of $1,259.83 with a higher 12.3% coupon rate, both with a yield to maturity of 9%.

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    The Lydic Corporation bond has a coupon rate of 6.8% based on its yield to maturity of 6.4%, price of $1,040, and par value of $1,000. The Mycroft Corp. bond price is $2,225 with a coupon rate of 4.9% and yield to maturity of 3.8%. The Faulk Corp. bond price is $740.28 with a lower 5.7% coupon rate compared to the Gonas Company bond price of $1,259.83 with a higher 12.3% coupon rate, both with a yield to maturity of 9%.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    56 views3 pages

    Assignment 4 (Revised) (Answers)

    Uploaded by

    kaank
    The Lydic Corporation bond has a coupon rate of 6.8% based on its yield to maturity of 6.4%, price of $1,040, and par value of $1,000. The Mycroft Corp. bond price is $2,225 with a coupon rate of 4.9% and yield to maturity of 3.8%. The Faulk Corp. bond price is $740.28 with a lower 5.7% coupon rate compared to the Gonas Company bond price of $1,259.83 with a higher 12.3% coupon rate, both with a yield to maturity of 9%.

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    ASSIGNMENT 4 (ANSWER)

    1) Lydic Corporation has bonds on the market with 12.5 years to maturity, a Yield to
    Maturity (YTM) of 6.4 percent, a par value of $1,000, and a current price of $1,040.
    The bonds make semiannual payments. What must the coupon rate be on these bonds?

    FV : $1,000
    PV : $1,040
    N : 12.5*2 = 25
    YTM: 6.4%; Semi-annually = 6.4 / 2 = 3.20%
    PV = C/r * (1-1/(1+r)^n) + F/(1+r)^n
    1,040 = C / 0.032 * [1 – (1/1.032)^25] + (1000/1.032)^25
    C = $33,94
    Coupon Rate = r = C/F *2
    Coupon Rate = (33,94 / 1,000) *2= 6,8%

    2) Mycroft Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.9
    percent paid semiannually and 13 years to maturity. The yield to maturity of the bond
    is 3.8 percent. What is the dollar price of the bond?

    FV: $2,000
    Coupon rate: 4.9%
    Semiannual coupon payment = (Par value * coupon rate) / 2 = (2000*0.049)/2 = $49
    YTM: 3.8%; Semi-annual YTM = 1.9%
    C: $49
    r: 1.9% = 0.019
    T: 13*2= 26
    FV: 2,000
    Bond Price = C * [(1- 1/(1+r)^n)/r] + F/(1+r)^T
    Bond Price= 49 * [(1- 1/(1+0.019)^26)/0.019] + [2,000 /(1+0.019)^26] = $2,225
    3) The Faulk Corp. has a bond with a coupon rate of 5.7 percent outstanding. The Gonas
    Company has a bond with a coupon rate of 12.3 percent outstanding. Both bonds have
    14 years to maturity, make semiannual payments, and have a YTM of 9 percent. What
    are the prices of these bonds? How would you comment by referring to the coupon
    rate of these two bonds?
    Faulk Corp.:
    Coupon rate: 5.7% = 0.057
    r: 9% / 2 = 4.5% = 0.045
    T: 14*2 = 28
    F: $1000
    C = (1000*0.057) / 2 = $28.5
    Bond Price = C * [(1- 1/(1+r)^n)/r] + F/(1+r)^T
    Bond Price = 28.5*[(1- (1/1.045^28) /0.045 +1000/1.04528= (28.5 * 15.744) + 291.579 = $740.28

    Gonas Company:
    Coupon rate: 12.3% = 0.123
    r: 9% / 2 = 4.5% = 0.045
    T: 14*2 = 28
    FV: $1,000
    C= (1,000*0.123) / 2= $61.5
    Bond Price= 61.5* [(1- (1/1.045^28) /0.045+ 1,000/1.045^28 = (61.5 * 15.744) + 291.579 = $1.259,83

    The Faulk Corp. bond has a lower coupon rate of 5.7 percent compared to the Gonas
    Company bond's coupon rate of 12.3 percent. Thus, Faulk Corp. bond pays a lower interest to
    bondholders relative to its face value. Although both bonds have the same YTM of 9 percent
    we expect lower coupon bond to be more sensitive to interest rate changes compared to higher
    coupon bonds.

    4) Cuban Corp. will pay a dividend of $3.08 per share next year. The company pledges to
    increase its dividend by 4.6 percent per year indefinitely. If you require a return of 11
    percent on your investment, how much will you pay for the company’s stock today?

    D1= $3.08
    R: 11% = 0.11
    g: 4.6% = 0.046
    PV = 3.08 / (0.11 – 0.046) = $48.125
    5) Upton Co. is growing quickly. Dividends are expected to grow at 27 percent for the
    next three years, with the growth rate falling off to a constant 4.5 percent thereafter. If
    the required return is 10.4 percent and the company just paid a dividend of $2.65, what
    is the current share price?

    g1: 27% = 0.27


    g2: 4.5% = 0.045
    R: 10.4% = 0.104
    D0: $2.65
    Dividend Differential Growth Model Formula:
    PV= [2.65*(1.27) / (0.104-0.27)] * [1-(1.27)^3/(0.104)^3] + [(2.65*(1.27)^3*(1.045)/(0.104)
    (0.045))/(0.104)^3]
    PV = $82,06

    6) Lotharan Corp. has yearly sales of $31.5 million and costs of $17.3 million. The
    company’s balance sheet shows debt of $59 million and cash of $21 million. There are
    975,000 shares outstanding, and the industry EV/EBITDA multiple is 7.5. What is the
    company’s enterprise value? What is the stock price per share?

    EBITDA = Sales – Cost


    EBITDA = 31,500,000 – 17,300,000 = 14,200,000
    Enterprise value = EV/EBITDA multiple * EBITDA = 7.5*14,200,000=106,500,000
    Equity Value = EV – Debt + Cash = 106,500,00 – 59,000,000 + 21,000,000 = 68,500,000
    Stock price per share = Equity Value / Number of shares outstanding
    Stock price per share = 68,500,000 / 975,000 = $70.256

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