Finansal Yönetim - II The Capital Budgeting Process 2 12) Tom Cruise Lines, Inc., issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 12 percent. This return was in line with the required returns by bondholders at that po int as described below: Real rate of return ............ 3% Inflation premium ............ 5 Risk premium ................... 4 Assume that five years later the inflation premium is only 3 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The b onds have 20 years remaining until maturity. Compute the new price of the bond. 14) Good News Razor Co. issued bonds 10 years ago at $1,000 per bond. These bonds had a 40 year life when issued and the annual interest payment was then 12 percent. This ret urn was in line with the required returns by bondholders at that point in time as described below: Risk-free rate of return … … .6% Risk premium ................... 5 Assume that 10 years later, due to favorable publicity, the risk premium is now 3 percent and is appropri ately reflected in the required return (or yield to maturity) of the bonds. The bonds have 30 years remaining until maturity. Compute the new price of the bond. Bonds issued by the Crane Optical Company have a par value of $1,000, which 17) is also the amoun t of principal to be paid at maturity. The bonds are currently selling for $850. They have 10 years remaining to maturity. The annual interest payment is 9 percent ($90). Compute the approximate yield to maturity Bonds issued by the West Motel Chain have a par value of $1,000, are selling 18) for $1,100, and have 20 years remaining to maturity. The annual interest payment is 13.5 percent ($135).Compute the approximate yield to maturity 20) Robert Brown III is considering a bond investment in Southwest Technol ogy Company. The $1,000 bonds have a quoted annual interest rate of 8 percent and the interest is paid semiannually. The yield to maturity on the bonds is 10 percent annual interest. There are 25 years to maturity. Compute the price of the bonds based on s emiannual analysis. 22) The preferred stock of Ultra Corporation pays an annual dividend of $6.30. It has a required rate of return of 9 percent. Compute the price of the preferred stock.24) Venus Sportswear Corporation has preferred stock outstanding th at pays an annual dividend of $12. It has a price of $110. What is the required rate of return (yield) on the preferred stock? 26) Static Electric Co. currently pays a $2.10 annual cash dividend (D 0 ). It plans to maintain the dividend at this level for th e foreseeable future as no future growth is anticipated. If the required rate of return by common stockholders (K e ) is 12 percent, what is the price of the common stock? 27) BioScience, Inc., will pay a common stock dividend of $3.20 at the end of the y ear (D 1 ). The required return on common stock (K e ) is 14 percent. The firm has a constant growth rate (g) of 9 percent. Compute the current price of the stock (P 0 ). 31) A firm pays a $4.90 dividend at the end of year one (D 1 ), has a stock price of $70, an d a constant growth rate (g) of 6 percent. Compute the required rate of return.