# Finance Related Questions on Bond and Stock Valuation

1) "SRK Airport" authority issued a series of 3.4 percent 30-year bonds in February 2012. Interest rates rose substantially in the following years of the issue and made the price of the bond decline. 13 years later, in February 2025 the price of the bond has dropped from $1000 to $675. Assume that the bond requires annual interest payments.

a) What is yield to maturity of the bond? (Par value= $1000 in 2012)

b) Calculate the yield to maturity in February 2025.

c) If interest rate stabilizes after 2025 and remains same for the reminder of the life of the bonds, what will be the bonds price in 2040, two years before maturity.

d) What is the bond price during maturity (in 2042)?

e) Assuming the condition in part (c) what would have been the current yield of a "SRK Airport" bond in 2025 and in 2040?

2) In January 1, 2012, Anim purchased an outstanding Rosette Corporation bond that was issued on January 1, 2010. The Rosette Corporation bond has a 9.5 percent annual coupon and a 30-year original maturity (matures on December 2039). There is a 15-year call protection (until December 2014), after which time the bond can be called at 109 (109 percent of per or at $1090). Interest rates have declined since the bond was issued, and the bond is now selling at 116.575 percent of par or at $1,165.75. Anim wants to determine both the yield to maturity and the yield to call of this bond. (Note: during calculation of yield to call assume that the bond will be outstanding until the call date. Thus the investor will have received interest payments for the call protected period and then will receive the call price- in this case which is $1090 on the call date).

a) What is yield to maturity of the Rosette bond? What is its yield to call?

b) If Anim purchase this bond, which return do you think anim would actually earn? Explain your answer.

c) If the bond had sold at a discount, would the yield to maturity or the yield to call have been more relevant?

3) Mashrafee Inc. is expected to grow at a constant rate of 6 percent and its dividend yield is 7 percent. The company is about as risky as the average firms are in the industry.However, the company just successfully completed some R&D work that leads the company to expect that its earnings will grow at a rate of 50 percent this year and 25 percent the following year, after which growth should match the 6 percent industry average rate. The last dividend paid (D0) was $1.00. What is the value per share of the firm's stock?

4) You purchase a share of Kamal Corporation stock for $21.40. You expect it to pay dividends of $1.07; $1.1449 and $1.2250 in years 1, 2 and 3 respectively and you expect to sell it at a price of $26.22 at the end of 4 years.

a) Calculate the growth rate in dividends and the expected dividend yield.

b) Assume that the calculated growth rate (in a) is expected to continue, you can add the dividend yield to the expected growth rate to get the expected total rate of return. What is the stock's expected total rate of return?

https://brainmass.com/business/finance/finance-related-questions-bond-stock-valuation-546086

#### Solution Preview

Dear Student:

Q1. SRK Airport 30-year bonds issued February 2012, mature 2042.

The computations have been made with a HP 10BII financial calculator; if you are using another calculator, you may need to adjust the inputs accordingly.

Q1a. Yield to maturity in 2012 (assuming that the price of the bond was $1000; the problem does not specifically mention this, but bonds are often issued at par)

N = 30 (years to maturity)

FV = $1000 (future value is the face value of the bond)

PMT = $34 (coupon interest rate 3.4% paid annually multiplied by the face value = 0.034 * 1000 = $34)

PV = -$1000 (present value of the bond; note that the calculator requires the input of the present value as a negative number)

Compute I = 3.4% (note the overall rule: when the current price of the bond equals the face value, the coupon interest rate equals the yield to maturity of the bond)

Q1b. Yield to maturity in 2025

N = 30 - 13 = 17 (years to maturity from 2025 to 2042)

FV = $1000 (future value is the face value of the bond)

PMT = $34 (coupon interest rate 3.4% paid annually multiplied by the face value = 0.034 * 1000 = $34)

PV = -$675 (present value of the bond given; note that the calculator requires the input of the present value as a negative number)

Compute I = 6.6481489 = 6.65% (note the overall rule: when the bond sells at a discount, that is, below the face value, the yield to maturity of the bond is higher than the coupon interest rate)

Q1c. Price of bond in 2040

N = 2 (years to maturity from 2040 to 2042)

FV = $1000 (face value of the bond)

PMT = $34 (coupon interest rate 3.4% multiplied by the face value = 0.034 ...

#### Solution Summary

The yield to maturity of bonds are calculated. The bond price during maturity are determined.

Finance Questions

1. How is valuation of any financial asset related to future cash flows?

2. Why might investors demand a lower rate of return for an investment in ExxonMobil as compared to United Airlines?

3. What are the three factors that influence the required rate of return by investors?

4. If inflationary expectations increase, what is likely to happen to yield to maturity on bonds in the marketplace? What is also likely to happen to the price of the bonds?

5. Why is the remaining time to maturity an important factor in evaluating the impact of a change in yield to maturity on bond prices?

6. What are the three adjustments that have to be made in going from manual to semiannual bond analysis?

7. Why is a change in required yield for preferred stock likely to have a greater impact on price than a change in required yield for bonds?

8. What type of dividend pattern for common stock is similar to the dividend payment for preferred stock?

9. What two components make up the required rate of return on common stock?

10. What factors might influence a firm's price-earnings ratio?

11. How is the supernormal growth pattern likely to vary from the normal, constant growth pattern?

12. What approaches can be taken in valuing a form's stock when there is no cash dividend payment?