Purchase Solution

Bond and stock valuation models

Not what you're looking for?

Ask Custom Question

Use the following information to answer questions 3 thorough 4: Suppose a company is going to issue new bond which has an 6% coupon, 30-year maturity with par value of $1000 paying 60 semiannual coupon payments of $30 each. Assume that the market interest rate for this bond is 6%

a. What is the price of the bond?
b. What would be the price of the bond if the market interest rate were to rise to 10%?

8. Michael Williams Jewelers recently issued a $1,000 face, 20-year zero-coupon bond for $225. The initial public offering sold in January 2006. What is the yield to maturity on this bond at issuance?

11. After reading today's copy of The Wall Street Journal, you've observed that the nominal return on a one year Treasury Bill is 4.5%. Assuming an inflation rate of 3.3%, what is the real return on this investment? (Format to 4 decimal places).

12. As you read the bond pages of The Wall Street Journal, you notice a bond selling for $340 which pays no interest and matures to a value of $1000 eight years from today. What return would you earn if you bought this bond today and held it to maturity?

13. Kansas Electric Company is going to issue new bond which has an 6% coupon, 30-year maturity with par value of $1000 paying 60 semiannual coupon payments of $30 each. Assume that the market interest rate for this bond is 8%. What would be the price of the bond?

Chapter 8

1. You are contemplating buying stock. The current dividend is $3.50 per year, and the expected dividend growth rate is a constant 4%. You require a rate of return of 9% on this investment. What would you expect to be the price of this stock today?

2. PNC Bank has just issued some new preferred stock. The issue will pay a $17 annual dividend in perpetuity beginning four years from now. If the market requires a 14% return on this investment, how much does a share of stock cost today?

3. Southern Company is a large Atlanta utility. Its cash dividend for the current year is estimated to be $1.30/share. Dividends are expected to grow at a 5% rate. If investors require a rate of return of 15% on the stock. What price will they be willing to pay for each share?

4. Records Inc. is a firm that archives computer records of numerous business firms to save them computer space and yet allow easy retrieval. The firm has 1 million common shares outstanding. The growth rate for Records Inc. is 6 percent and analysts expect it to remain constant for the foreseeable future. The current dividend paid was $0.80. Investors require a 14 percent rate of return. What is the current value or price of Record's stock?

5. Pendulum Mining Company's ore reserves are being depleted, so its sales are falling. Also, its pit is getting deeper each year, so its costs are increasing. As a result, the company's earnings and dividends are declining at the constant rate of 10 percent per year. If the last dividend paid was $6 and investors' required rate of return was 15 percent, what is the value of Pendulum Mining's stock?

6. Warwick Investments common stock is currently selling for $66.25 per share. You expect the next dividend to be $5.30 per share. If the firm has a dividend growth rate of 4%, what is its cost of equity?

Attachments
Purchase this Solution
Solution Summary

There are 11 problems. Solution to each problem depicts the step by step method to find out the value of desired parameter.

Solution Preview

Please refer attached file for better clarity of solutions.

Use the following information to answer questions 3 thorough 4: Suppose a company is going to issue new bond which has an 6% coupon, 30-year maturity with par value of $1000 paying 60 semiannual coupon payments of $30 each. Assume that the market interest rate for this bond is 6%

a. What is the price of the bond?

Semi Annual Coupon payment=C=1000*6%/2=$30
Maturity Amount=M=$1000
Market rate=r=6%/2=3% semi annual
Number of semiannual coupon payments=n=60

Price of bond=C/r*(1-1/(1+r)^n)+M/(1+r)^n
=30/3%*(1-1/(1+3%)^60)+1000/(1+3%)^60
=$1000

b.What would be the price of the bond if the market interest rate were to rise to 10%?

Semi Annual Coupon payment=C=1000*6%/2=$30
Maturity Amount=M=$1000
Market rate=r=10%/2=5% semi annual
Number of semiannual coupon payments=n=60

Price of bond=C/r*(1-1/(1+r)^n)+M/(1+r)^n
=30/5%*(1-1/(1+5%)^60)+1000/(1+5%)^60
=$621.41

8. Michael Williams Jewelers recently issued a $1,000 face, 20-year zero-coupon bond for $225. The initial public offering sold in January 2006. What is the yield to maturity on this bond at issuance?

Maturity Amount=FV=$1000
Current Price=PV=$225
Number of periods=n=20
YTM=r=?

We know that
FV=PV*(1+r)^n
1000=225*(1+r)^20
4.4444444 =(1+r)^20
(1+r)=(4.4444444)^(1/20)= 1.077434
r=0.077434=7.74%
Yield to maturity on bond issuance=7.74%

11. After reading today's copy of The Wall Street Journal, you've ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Motivation

This tests some key elements of major motivation theories.

SWOT

This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce

View More Free Quizzes
Related BrainMass Solutions

  • Time Value of Money in bond market value; zero growth

    224464 Time Value of Money in bond market value; zero growth in common stock Valuation of common stock and bonds is an important financial task for investors.

  • Valuing Stocks, Options and Bonds

    These problems apply different models of valuation. Solutions to given problems describe the methodology to estimate the fair value of option, bond and stock as the case may be.

  • Valuation models and Rates of Return (ROR) on bonds, stocks

    a. 9.33% b. 7.94% c. 12.66% d. 8.10% 4) Stock valuation models are dependent upon a. expected dividends, future dividend growth and an appropriate discount rate. b. past dividends, flotation costs and bond yields. c.

  • Stock Valuation versus Bond Valuation

    Bond valuation is directly related to the rate of interest the bond pays, the current rate of interest, and the value of the bond on redemption. Each of these can be easily ascertained. So, stock valuation is considerably less precise.

  • Valuation models of securities

    The solution depicts the steps to estimate the price of common stock, preferred stock, zero-coupon bond and coupon paying bonds.

  • Equity Valuation Models - CAPM & CGM

    Retrieved January 2012 from http://www.investopedia.com/university/fundamentalanalysis/ Detailed calculations including CAPM and CGM. Explores strengths and limitations of both valuation models.

  • Valuation: Zero-Coupon, Convertible, and Corporate Bonds

    Valuation - corporate bond A $1,000 corporate bond with 10 years to maturity pays a coupon of 8% (semi-annual) and the market required rate of return is a) 7.2% and b) 10%. What is the current selling price for a) and b)? 5.

  • Bond Valuation, Dividend Discount Model, Required Return, CAPM

    376312 Bond Valuation, Dividend Discount Model, Required Return, CAPM A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond's coupon rate is 7.4%.

  • Capital Valuation - Walmart

    485346 Capital Valuation - Walmart Justify the current market price of the organization's (Walmart) debt, if any, and equity using various capital valuation models.

  • Valuation Problems

    283429 Bond Valuation, Stock Valuation, Preferred Stock Required Return, Preferred Stock Valuation, Bond Valuation/ YTM/ Interest Rate Risk, Bond Returns, Stock/ Business Valuation, CAPM Capital Structure Decisions & Credit Ratings Dividend

View More Related Solutions