Answer:
1) Cost of equity is 12.501%
2) Price of bond is $935.82
3) Price of semi-annual bond is $934.96
Explanation:
1) Given:
Beta = 1.1
Risk free rate (Rf) = 3.25%
Market risk premium (Rp) = 8.41%
Using CAPM to compute cost of equity:
Re = Rf + β (Rp)
= 3.25 + 1.1(8.41)
= 12.501%
2) Price of bond is present value of bond.
Face value (FV) = $1,000
Maturity (nper) = 10 years
Coupon rate = 8%
Coupon payment (PMT) = 0.08× 1000 = $80
Discount rate (rate) = 9% or 0.09
Using spreadsheet function =PV(rate,nper,pmt,FV)
Price of bond is $935.82. It is negative as it's cash outflow
3) Price of semi-annual bond is present value of bond.
Face value (FV) = $1,000
Maturity (nper) = 10×2 = 20 periods
Coupon rate = 8% ÷ 2 = 4%
Coupon payment (PMT) = 0.04× 1000 = $40
Discount rate (rate) = 9% ÷ 2 = 4.5% or 0.045
Using spreadsheet function =PV(rate,nper,pmt,FV)
Price of semi-annual bond is $934.96
