Reference no: EM132368877
Problem Set - Valuation of Securities
Complete the following problems from Chapters 6 and 7 in Principles of Managerial Finance: (USE EXCEL).
1. Bond Valuation:
1. Valuation of assets - Using the information provided in the following table, find the value of each asset today.
|
Asset
|
Cash Flow
|
Appropriate required return
|
|
year
|
Amount
|
|
A
|
1
|
$3,000
|
8%
|
|
2
|
3,000
|
|
3
|
3,000
|
|
B
|
1 through ∞
|
$500
|
5%
|
|
C
|
1
|
$0
|
6%
|
|
2
|
0
|
|
3
|
0
|
|
4
|
0
|
|
5
|
45,000
|
|
D
|
1 through 5
|
$1,500
|
4%
|
|
6
|
8,500
|
|
E
|
1
|
$2,000
|
7%
|
|
2
|
3,000
|
|
3
|
5,000
|
|
4
|
7,000
|
|
5
|
4,000
|
|
6
|
1,000
|
2. Bond value and changing required returns - Midland Utilities has a bond issue out-standing that will mature to its $1,000 par value in 12 years. The bond has a coupon rate of 11% and pays interest annually.
a. Find the value of the bond if the required return is (1) 11%, (2) 15%, and (3) 8%.
b. Plot your findings in part a on a set of "required return (x-axis)-market value of bond (y-axis)" axes.
c. Use your findings in parts a and b to discuss the relationship between the coupon rate on a bond and the required return and the market value of the bond relative to its par value.
d. What two possible reasons could cause the required return to differ from the coupon rate?
3. Yield to maturity - Each of the bonds shown in the following table pays interest annually.
|
Bond
|
Par value
|
Coupon rate
|
Years to maturity
|
Current value
|
|
A
|
$1,000
|
9%
|
8
|
$820
|
|
B
|
1,000
|
12
|
16
|
1,000
|
|
C
|
500
|
12
|
12
|
560
|
|
D
|
1,000
|
15
|
10
|
1,120
|
|
E
|
1,000
|
5
|
3
|
900
|
a. Calculate the yield to maturity (YTM) for each bond.
b. What relationship exists between the coupon rate and yield to maturity and the par value and market value of a bond? Explain.
2. Stock Valuation - Personal Finance Problem
1. Common stock value: Zero growth Kelsey Drums Inc. is a well-established supplier of fine percussion instruments to orchestras all over the United States. The company's class A common stock has paid a dividend of $2.80 per share per year for the last 12 years. Management expects to continue to pay at that amount for the foreseeable future. Kim Arnold purchased 200 shares of Kelsey class A common stock 10 years ago at a time when the required return for the stock was 7.6%. She wants to sell her shares today. The current required rate of return for the stock is 9.25%. How much capital gain or loss will Kim have on her shares?
2. Common stock value: Constant growth Use the constant-growth dividend model (Gordon growth model) to find the value of each firm shown in the following table.
|
Firm
|
Dividend expected next year
|
Dividend growth rate
|
Required return
|
|
A
|
$1.20
|
8%
|
13%
|
|
B
|
4.00
|
5
|
15
|
|
C
|
0.65
|
10
|
14
|
|
D
|
6.00
|
8
|
9
|
|
E
|
2.25
|
8
|
20
|
3. Common stock value: Constant growth McCracken Roofing Inc. common stock paid a dividend of $1.20 per share last year. The company expects earnings and dividends to grow at a rate of 5% per year for the foreseeable future.
a. What required rate of return for this stock would result in a price per share of $28?
b. If McCracken expects both earnings and dividends to grow at an annual rate of 10%, what required rate of return would result in a price per share of $28?