Section D: Comprehensive Problems (50 Marks) 1. The Stambaugh Corporation currently has earnings per share of $8.20. The company has no growth and pays out all earnings as dividends. It has a new project that will require an investment of $1.95 per share in one year. The project only a two-year project, and it will increase earnings in the two years following the investment by $2.75 and $3.05 respectively. Investors require a return of 12 percent on Stambaugh stock. Required: (a) What is the value per share of the company's stock assuming the firm does not under- take the investment opportunity? (b) If the company does undertake the investment, what is the value per share now? 7 9 (c) Again, assume the company undertakes the investment. What will the price per share be four years from today? 2. Miller Corporation has a premium bond making semiannual payments. The bond pays a coupon of 8.5 percent, has YTM of 7 percent, and has 13 years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond pays a coupon of 7 percent, has a YTM of 8.5 percent, and also has 13 years to maturity. Required: If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now? In 3 years? In 8 years? In 12 years? In 13 years? What's going on here? Illustrate your answers by graphing bond prices versus time to maturity.