Homework 1

Due 1/23

1. (10 points) Why is it usually argued prices in the stock market (or any asset) are equal to the present value of their payoffs?

2. (10 points) A bond with par value (principal) $1,000 and an annual coupon (i.e., interest payment) of 8% matures in six years. The current yield is 6%. What is the current price of the bond assuming the first interest payment is a year from now?

3. (10 points) Company Syracuse's dividends are expected to grow at a constant rate of and What is the current price?

4. (20 points) An area of land at SU has been planted with Christmas trees. On December 1, ten years from now, the trees will be ready for harvest. At that time, the standing Christmas trees can be sold for $1000 per acre. The land, after the trees have been removed, will be worth $200 per acre. There are no taxes or operating expenses (since students are helping the project), but also no revenue from this land until the trees are harvested. The interest rate is 10%

   1. What can we expect the market price of the land to be?

   2. Suppose that the Christmas trees do not have to be sold after 10 years, but could be sold in any year. Their value if they are cut before they 10 years old is zero. After the trees are 10 years old, an acre of trees in worth $1000 and its value will increase by $100 per year for the next 20 years. After the trees are cut, the land on which the trees stood can always be sold for $200 an acre. When should the trees be cut to maximize the present value of the payments received for trees and land?

   3. What will be the market price of an acre of land?