2024 – A 25 year 8 semiannual coupon bond with a par value of 1 000 may be

A 25-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,100. The bond sells for $950. (Assume that the bond has just been issued.)

a. What is the bond’s yield to maturity? Round your answer to two decimal places. %

b. What is the bond’s current yield? Round your answer to two decimal places. %

c. What is the bond’s capital gain or loss yield? Round your answer to two decimal places. %

d. What is the bond’s yield to call? Round your answer to two decimal places. %

 

The earnings, dividends, and common stock price of Shelby Inc. are expected to grow at 6% per year in the future. Shelby’s common stock sells for $20.75 per share, its last dividend was $1.50, and the company will pay a dividend of $1.59 at the end of the current year.

a.Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places. %

b. If the firm’s beta is 1.0, the risk-free rate is 5%, and the expected return on the market is 12%, then what would be the firm’s cost of equity based on the CAPM approach? Round your answer to two decimal places. %

c.If the firm’s bonds earn a return of 11%, and analysts estimate the market risk premium is 3 to 5 percent, then what would be your estimate of rs using the over-own-bond-yield-plus-judgmental-risk-premium approach? Round your answer to two decimal places. (Hint: Use the midpoint of the risk premium range). %

d.On the basis of the results of parts a through c, what would be your estimate of Shelby’s cost of equity? Assume Shelby values each approach equally. Round your answer to two decimal places