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Bond and Stock Valuation Basis and Applications

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Question 5
a. The Lutfus Corp offers a 6% bond with a current market price of $875.05. The yield to maturity is
7.34%. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond
b. A corporate bond with a face value of $1,000 matures in 4 years and has a 8% coupon paid at the end
of each year. The current price of the bond is $932. What is the yield to maturity for this bond?
c. The Chocolate Factory Inc. is expecting its ice cream sales to decline due to the increased interest in
healthy eating. Thus, the company has announced that it will be reducing its annual dividend by 5% a
year for the next two years. After that, it will maintain a constant dividend of $1 a share. Two weeks
ago, the company paid a dividend of $1.40 per share. What is the current worth of the stock if you
require a 9% rate of return?
d. Active Planet Bhd. is preparing to pay its first dividends. It is going to pay $1.00, $2.50, and $5.00 a
share over the next three years, respectively. After that, the company has stated that the annual
dividend will be $1.25 per share indefinitely. What is the current worth of this share if you require a
7% rate of return?
e. Your portfolio consists of $100,000 invested in a stock which has a beta = 0.8, $150,000 invested in a
stock which has a beta = 1.2, and $50,000 invested in a stock which has a beta = 1.8. The risk-free rate
is 7 percent. Last year this portfolio had a required rate of return of 13 percent. This year nothing has
changed except for the fact that the market risk premium has increased by 2 percent (two percentage
points). What is the portfolio's current required rate of return?

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Solution Summary

This posting addresses the application of bond based on face value, yield to maturity, coupon rate and also stock value based on dividend and its growth rate (which can be negative)

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Accounting What the Numbers Mean

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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:


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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