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Question 1: (10 points). (Bond valuation) Calculate the
value of a bond that matures in 12 years and has $1,000 par value. The annual
coupon interest rate is 9 percent and the market’s required yield to maturity
on a comparable-risk bond is 12 percent. Round to the nearest cent.
The value of the bond is
Question 2: (10 points). (Bond valuation) Enterprise, Inc.
bonds have an annual coupon rate of 11 percent. The interest is paid
semiannually and the bonds mature in 9 years. Their par value is $1,000. If the
market’s required yield to maturity on a comparable-risk bond is 14 percent,
what is the value of the bond? What is its value if the interest is paid
annually and semiannually? (Round to the nearest cent.)
a. The value of the Enterprise bonds if the interest is paid
semiannually is $
b. The value of the Enterprise bonds if the interest is paid
annually is $
Question 3: (10 points). (Yield to maturity) The market
price is $750 for a 20-year bond ($1,000 par value) that pays 9 percent annual
interest, but makes interest payments on a semiannual basis (4.5 percent
semiannually). What is the bond’s yield to maturity? (Round to two decimal
places.)
The bond’s yield to maturity is %
Question 4: (10 points). (Yield to maturity) A bond’s market
price is $950. It has a $1,000 par value, will mature in 14 years, and has a
coupon interest rate of 8 percent annual interest, but makes its interest
payments semiannually. What is the bond’s yield to maturity? What happens to
the bond’s yield to maturity if the bond matures in 28 years? What if it
matures in 7 years? (Round to two decimal places.)
The bond’s yield to maturity if it matures in 14 years is %
The bond’s yield to maturity if it matures in 28 years is %
The bond’s yield to maturity if it matures in 7 years is %
Question 5: (15 points). (Bond valuation relationships)
Arizona Public Utilities issued a bond that pays $70 in interest, with a $1,000
par value and matures in 25 years. The markers required yield to maturity on a
comparable-risk bond is 8 percent. (Round to the nearest cent.) For questions
with two answer options (e.g. increase/decrease) choose the best answer and
write it in the answer block.
Question Answer
a. What is the value of the bond if the markers required
yield to maturity on a comparable-risk bond is 8 percent? $
b. What is the value of the bond if the markers required
yield to maturity on a comparable-risk bond increases to 11 percent? $
c. What is the value of the bond if the market’s required
yield to maturity on a comparable-risk bond decreases to 7 percent?
$
d. The change in the value of a bond caused by changing
interest rates is called interest-rate risk. Based on the answer: in parts b
and c, a decrease in interest rates (the yield to maturity) will cause the
value of a bond to (increase/decrease):
By contrast in interest rates will cause the value to
(increase/decrease):
Also, based on the answers in part b, if the yield to
maturity (current interest rate) equals the coupon interest rate, the bond will
sell at (par/face value):
exceeds the bond’s coupon rate, the bond will sell at a
(discount/premium):
and is less than the bond’s coupon rate, the bond will sell
at a (discount/premium):
e. Assume the bond matures in 5 years instead of 25 years,
what is the value of the bond if the yield to maturity on a comparable-risk
bond is 8 percent? $ 960.07 Assume the bond matures in 5 years instead of 25
years, what is the value of the bond if the yield to maturity on a comparable-risk
bond is 11 percent? $
f. Assume the bond matures in 5 years instead of 25 years,
what is the value of the bond if the yield to maturity on a comparable-risk
bond is 7 percent? $
g. From the findings in part e, we can conclude that a bondholder
owning a long-term bond is exposed to (more/less) interest-rate risk than one
owning a short-term bond.
Question 6: (5
points). (Measuring growth) If Pepperdine, Inc.’s return on equity is 14
percent and the management plans to retain 55 percent of earnings for
investment purposes, what will be the firm’s growth rate? (Round to two decimal
places.)
The firm’s growth rate will be %
Question 7: (10 points). (Common stock valuation) The common
stock of NCP paid $1.29 in dividends last year. Dividends are expected to grow
at an annual rate of 6.00 percent for an indefinite number of years. (Round to
the nearest cent.)
a. If your required rate of return is 8.70 percent, the
value of the stock for you is: $
b. You (should/should not) make the investment if your
expected value of the stock is (greater/less) than the current market price
because the stock would be undervalued.
Question 8: (10 points). (Measuring growth) Given that a
firm’s return on equity is 22 percent and management plans to retain 37 percent
of earnings for investment purposes, what will be the firm’s growth rate? If
the firm decides to increase its retention rate, what will happen to the value
of its common stock? (Round to two decimal places.)
a. The firm’s growth rate will be:
b. If the firm decides to increase its retention ratio, what
will happen to the value of its common stock? An increase in the retention rate
will (increase/decrease) the rate of growth in dividends, which in turn will
(increase/decrease) the value of the common stock.
Question 9: (10 points). (Relative valuation of common
stock) Using the P/E ratio approach to valuation, calculate the value of a
share of stock under the following conditions:
• the
investor’s required rate of return is 13 percent,
• the
expected level of earnings at the end of this year (E1) is $8,
• the firm
follows a policy of retaining 40 percent of its earnings,
• the
return on equity (ROE) is 15 percent, and
• similar
shares of stock sell at multiples of 8.571 times earnings per share.
Now show that you get the same answer using the discounted
dividend model. (Round to the nearest cent.)
a. The stock price using the P/E ratio valuation method is: $
b. The stock price using the dividend discount model is: $
Question 10: (10 points) (Preferred stock valuation)
Calculate the value of a preferred stock that pays a dividend of $8.00 per
share when the market’s required yield on similar shares is 13 percent. (Round
to the nearest cent.)
a. The value of the preferred stock is $ Per
share
