12-1: Jerry and his wife just purchased the U.S. Treasury bond, and they have annual income $300,950. The bond will pay a lump sum of $1,000 exactly 4 years from today. The nominal interest rate is 6%. If the coupon rate is 8%, and compounded semiannually, answer the following questions:

1)How much should they pay for the bond price?

2)As an alternative, someone suggests to buy a State of North Carolina bond with exactly the same term, which one should they choose, Treasury bond or Sate bond? Why?

3)If the nominal rate goes up, how does that affect the bond price?

12-2.Dyer Furniture's current dividend is $2.00 per share, and the dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.2, the return on S&P500 is 9.50%, and the return on 3-month Treasury Bill is 3.00%. Answer the following questions:

1)What is Dyer's required rate of return on its stock?

2)What is Dyer's current stock price if the dividend grows at 6% forever?

3)What will be Dyer's current stock price if the dividend does not grow in the future?

12-3.Kinkead Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be $10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm's value of operations, in millions?

CAPM:

Gordon Model: