WK7

11. Twin Oaks Health Center has a bond issue outstanding with a coupon rate of 7% and four years 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 conditions justify a 14% 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% semiannual required rate of return. The actual rate would be slightly less than 7% 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? (Assume a 7% semiannual required rate of return although the actual rate would probably be greater than 7% because of increased risk.)

11.4 Pacific Homecare has three bond issues outstanding. All three bonds pay $100 in annual interest plus $1,000 at maturity. Bond S has a maturity of five years, Bond M has a 15- year maturity, and Bond L matures in 30 years.

a. What is the value of these bonds when the required interest rate is 5 percent, 10 percent, and 15 percent?

b. Why is the price of Bond L more sensitive to interest rate changes than the price of Bond S?

12.4 assume that the risk-free rate is 6 percent and the market risk premium is 6 percent. The stock of physicians Care Network (PCN) has a beta of 1.5. The last dividend paid by PCN (D_{o}) was $2 per share.

a. what would be PCN’s stock value be if the dividend was expected to grow at a constant:

-5 percent?

0 percent?

5 percent?

10 percent?

b. what would be the stock value if the growth rate is 10 percent, but PCN’s beta falls to

1.0?

0.5?