Problem One

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Problem One. A $1,000 unit bond has a coupon rate of 4% (interest paid yearly at $40 per year). The bond has five years left until it matures. The current market interest rate equals 5%.

Compute the bond's market value today.

Problem Two. You can use the same fact situation as problem one. The only item that has change is current market interest rate equals 3%. Compute the bond's market value today.

Problem Three. A stock pays a $2 dividend in year zero. Investors think the dividends will grow at 3% rate per year. This investor wishes to earn 15% on any stock investments (required return). Compute the common stock's current market value.

Problem Four. A ten unit apartment building has an annual $60,000 cash flow (similar to dividend when looking at stocks). The investor thinks the end of year one cash flow will equal $60,000 times 1.025. The investor thinks these cash flows may grow at 2.5% per year. The investor wants to earn a 9% interest rate on this investment. Compute the possible apartment building value today.

Problem Five. A stock currently has $10 EPS. Analysts estimate EPS may grow at 20% per year over the next five years.

What is the estimated stock price in five years if an investor thinks the stock will then sell for a 10 P/E ratio?

The stock currently trades at $200 per share. If the investor buys the stock today and sells the stock in five years (based on the price you computed above), what compounded return does the investor earn.