25) Suppose that an investor has 8-year investment horizon. The investor is
considering a 15-year semi-annual coupon bond selling at \$990 (par value is
\$1000) and having a coupon rate of 4%. The investor expectations are as follows:
Ã¢â‚¬Â¢ The first 4 semi-annual coupon payments can be reinvested from the time of
receipt to the end of the investment horizon at an annual interest rate of 4%,
Ã¢â‚¬Â¢ the first 8 semi-annual coupon payments can be reinvested from the time of
receipt to the end of the investment horizon at an annual interest rate of 4.25%,
Ã¢â‚¬Â¢ the last 4 semi-annual coupon payments can be reinvested from the time of
receipt to the end of the investment horizon at a 3.75% annual interest rate, and
Ã¢â‚¬Â¢ the required market interest/discount rate on 7-year bonds at the end of the
investment horizon is 3.6%.
A) What is the YTM of the bond?
B) What is the total return on bond equivalent basis from investing in the
bond?
26) Consider a growth stock. Laramie Connection (LC) has the following data:
Ã¢â‚¬Â¢ Expected EPS next year is \$6.50;
Ã¢â‚¬Â¢ Payout ratio is 40%;
Ã¢â‚¬Â¢ Return on equity (ROE) is 25%
Ã¢â‚¬Â¢ Costs of capital or discount rate, r = 20%.
A) What is the value of LC’s stock? What is the value of LC’s growth
opportunity?
B) What happens to the value of LC’s stock if the company increases the
payout ratio from 40% to 60%?
C) What is the change in the value of LC’s growth opportunity relative to part
D) What happens to the value of LC’s stock if the company increases the
payout ratio from 40% to 60%, and its ROE is 10% instead of 25%? What is
the change in the value of LC’s growth opportunity relative to part (A) and

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