PROBLEM 1 Assume Venture Healthcare sold bonds that have a ten-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 bond’s value?

PROBLEM 1
Assume Venture Healthcare sold bonds that have a ten-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 bond’s value?
b. Suppose that two years after the bonds were issued, the required interest rate rose to 13 percent. What
would be the bond’s 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?
ANSWER

PROBLEM 3
Tidewater Home Health Care, Inc. has a bond issue outstanding with eight years remaining to maturity,
a coupon rate of 10 percent with interest paid annually, and a par value of $1,000. The current market
price of the bond is $1,251.22.
a. What is the bond’s yield to maturity?
b. Now, assume that the bond has semiannual coupon payments. What is its yield to maturity in this
situation?
ANSWER

PROBLEM 2
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?
ANSWER
Problem 5

Better Life Nursing Home, Inc. has maintained a dividend payment of $4 per share for many years. The
same dollar dividend is expected to be paid in future years. If investors require a 12 percent rate of
return on investments of similar risk, determine the value of the company’s stock.
ANSWER