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Stock and Bond Valuation

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Review problem-time value of money applications. Use the appropriate factors from Table 6-4 or Table 6-5 to answer the following questions:

Required:

a) Wright Co.'s common stock is expected to have a dividend of $5 per share for each of the next 10 years, and it is estimated that the market value per share will be $124 at the end of 10 years. If an investor requires a return on investment of 12%, what is the maximum price the investor would be willing to pay for a share of Wright Co. common stock today?

b) Antonio bought a bond with a face amount of $1,000, a stated interest rate of 8%, and a maturity date 10 years in the future for $978. The bond pays interest on an annual basis. Five years have gone by and the market interest rate is now 10%. What is the market value of the bond today?

c) Linda purchased a U.S. Series EE savings bond for $100, and eight years later received $159.38 when the bond was redeemed. What average annual return on investment did Linda earn over the eight years?

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The solution explains how to calculate the price of a stock and a bond

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a) Wright Co.'s common stock is expected to have a dividend of $5 per share for each of the next 10 years, and it is estimated that the market value per share will be $124 at the end of 10 years. If an investor requires a return on investment of 12%, what is the maximum price the investor would be willing to pay for a share of Wright Co. common stock today?

The maximum price will be the present value of the dividends and the price at the end of 10 years. Dividends are an annuity and we use table 6-5 to get the PV factor. For 10 years and 12%, the PV ...

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