Assume Venture Healthcare sold bonds that have a 10-year maturity, a 12 percent coupon rate with annual payments, and a $1,000 par value.
a. Suppose that two years after the bonds were issued, the required
interest rate fell to 7 percent. What would be the bonds' value?
b. Suppose that two years after the bonds were issued, the required
interest rate rose to 13 percent. What would be the bonds' value?
c. What would be the value of the bonds three years after issue in
each scenario above, assuming that interest rates stayed steady at
either 7 percent or 13 percent?
Twin Oaks Health Center has a bond issue outstanding with a cou¬pon rate of 7 percent and four remaining until maturity. The par value of the bond is $1,000, and the bond pays interest annually.
a. Determine the current value of the bond if present market condi¬tions justify a 14 percent required rate of return.
b. Now, suppose Twin Oaks' four-year bond had semiannual coupon
payments. What would be its current value? (Assume a 7 percent
semiannual required rate of return. However, the actual rate would
be slightly less than 7 percent because a semiannual coupon bond
is slightly less risky than an annual coupon bond.)
c. Assume that Twin Oaks' bond had a semiannual coupon but 20
years remaining to maturity. What is the current value under these
conditions? (Again, assume a 7 percent semiannual required rate of
return, although the actual rate would probably be greater than 7
percent because of increased price risk.)
Minneapolis Health System has bonds outstanding that have four years remaining to maturity, a coupon interest rate of 9 percent paid annually, and a $1,000 par value.
a. What is the yield to maturity on the issue if the current market price
b. If the current market price is $1,104?
c. Would you be willing to buy one of these bonds for $829 if you re¬quired a 12 percent rate of return on the issue? Explain your answer.
Six years ago, Bradford Community Hospital issued 20-year munic¬ipal bonds with a 7 percent annual coupon rate. The bonds were called today for a $70 call premium—that is, bondholders received $1,070 for each bond. What is the realized rate of return for those investors who bought the bonds for $1,000 when they were issued?
A person is considering buying the stock of two home health compa¬nies that are similar in all respects except the proportion of earnings paid out as dividends. Both companies are expected to earn $6 per share in the coming year, but Company D (for dividends) is expected to pay out the entire amount as dividends, while Company G (for growth) is expected to pay out only one-third of its earnings, or $2 per share. The companies are equally risky, and their required rate of return is 15 percent. D's constant growth rate is zero and G's is 8.33 percent. What are the intrinsic values of stocks D and G?
Medical Corporation of America (MCA) has a current stock price of $36 and its last dividend (D0) was $2.40. In view of MCA's strong financial position, its required rate of return is 12 percent. If MCA's dividends are expected to grow at a constant rate in the future, what
is the firm's expected stock price in five years?
A broker offers to sell you shares of Bay Area Healthcare, which just paid a dividend of $2 per share. The dividend is expected to grow at a constant rate of 5 percent per year. The stock's required rate of return is 12 percent.
a. What is the expected dollar dividend over the next three years?
b. What is the current value of the stock and the expected stock price
at the end of each of the next three years?
c. What is the expected dividend yield and capital gains yield for each
of the next three years?
d. What is the expected total return for each of the next three years?
e. How does the expected total return compare with the required rate
of return on the stock? Does this make sense? Explain your answer.
Lucas Clinic's last dividend (D0) was $1.50. Its current equilibrium stock price is $15.75, and its expected growth rate is a constant 5 per¬ cent. If the stockholders' required rate of return is 15 percent, what is the expected dividend yield and expected capital gains yield for the coming year?