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Security Valuation Models

Problem 1: Watters Umbrella Corp issed 15 yr bonds 2 yrs ago at a coupon rate of 7.8%. The bonds make semiannual payments. If these bonds currently sell for 105% of par value, what is the YTM?

Problem 2: The next dividend payment by ZYX, Inc., will be $2.85 per share. The dividends are anticipated to maintain a 4.5% growth rate, forever. If ZYX stock currently sells for $84 per share, what is the required return?

Problem 3: Mickelson Corporation will pay a $2.90 per share dividend next year. The company pledges to increases its duvudebd by 4.75 percent per year, indefinitely. If you require an 11 percent return on your investment, how much will you pay for the company's stock?

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Solution Preview

Please refer attached file for better understanding of formulas in MS Excel.

Problem 1

Settlement 1/1/13 (Think of Settlement as the beginning of the duration of the bond)
Maturity 1/1/26 (Think of Maturity as the end of the duration ...

Solution Summary

There are 3 problems. Solution to first problem depicts the methodology to find the YTM of a given bond. Solution to second problem calculates the required return in case of a stock. Solution to third problem describes the steps to estimate the price of a stock. Calculations are carried out with the help of suitable formulas in MS Excel.