Assignment $2-30$ points

Bond $P$ is a premium bond with a $10\%$ coupon. Bond $D$ is a $4\%$ coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of $7\%,$ and have eight years to maturity. If interest rates remain unchanged,

a$)$ what are the expected capital gains yield over the next year for Bond $P$ and Bond D$?4$ points

b$)$ explain $($in a couple paragraphs$)$ your answers and the interrelationships among the YTM$,$ coupon rate, and capital gain yield. $2$ points

You bought one of BB Co$.\text{'}$s $10\%$ coupon bonds one year ago for $$1100.$ These bonds make annual payments, have a face value of $$1000$ each, and mature seven years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is $8\%.$ If the inflation rate was $3\%$ over the past year, what would be your total real return on investment according to the Fisher equation? $4$ points

You purchase a bond with an invoice price of $$960.$ The bond has a coupon rate of $5\mathrm{.}5\%,5$ years to maturity, and there are three months to the next semiannual coupon date. What is the flat price of the bond? $3$ points

The yield to maturity on one$-$year zero$-$coupon bonds is currently $7$ percent; the YTM on twoyear zeroes is $8$ percent. The federal government plans to issue a two$-$year$-$maturity coupon bond, paying coupons once per year with a coupon rate of $9$ percent. The face value of the bond is $$100.$ At what price will the bond sell? $4$ points

An analyst uses the constant growth model to evaluate a company with the following data:

Leverage ratio $($asset$/$equity$)$: $1\mathrm{.}5$

Total asset turnover: $1\mathrm{.}6$

Current ratio: $1\mathrm{.}8$

Net profit margin: $6\%$

Dividend payout ratio: $35\%$

Earnings per share in the past year: $$0\mathrm{.}9$

The required rate on equity: $14\%$

Based on an analysis, the growth rate of the company will drop by $25$ percent per year in the next two years and then remain unchanged afterward. Assume that the company will keep its dividend policy unchanged.

a$)$ Use the multi$-$period DDM to estimate the intrinsic value of the company's stock. $5$ points

b$)$ Suppose after one year, everything else will be unchanged but the required rate on equity will decrease to $13\%.$ What would be your holding period return for the year? $3$ points

$6.$ West Fraser Timber Company $($WFT$)$ is expected to have free cash flow in the coming year of $$2$ million and its free cash flow is expected maintain at a sustainable growth rate of $4\%$ per year. It has a debt worth $$10$ million. It's equity cost of capital is $12\%,$ cost of debt before tax is $6\%,$ and it pays a corporate tax rate of $30\%.$ If WFT Company maintains a debt$-$equity ratio of $0\mathrm{.}5$ and the company has $3$ million common shares outstanding, what is the fair value of WFT stock? $5$ points