Share
Explore BrainMass

Valuation

Please see the attached file.

Valuation Basics

1. A best selling author decides to cash in on her latest novel by selling the rights to the book's royalties for the next four years to an investor. Royalty payments arrive once per year, starting one year from now. In the first year, the author expects $400,000 in royalties, followed by $300,000, then $100,000 then $10,000 in the three subsequent years. If the investor purchasing the rights to royalties requires a return of 7 percent per year, what should the investor pay?

Bond Prices and Interest Rates

12. Bennifer Jewelers recently issued ten-year bonds that make annual interest payments of $50. Suppose you purchased one of these bonds at par value when it was issued. Right away, market interest rates jumped, and the YTM on your bond rose to 6 percent. What happened to the price of your bond?

The Essential Features of Preferred and Common Stock

1. The equity section of the balance sheet for Hilton Web-Cams looks like this:
Common Stock, $0.25 par $400,000
Paid-in capital in excess of par $4,500,000
Retained earnings $1,100,000

a. How many shares has the company issued?
b. What is the book value per share?
c. Suppose that Hilton Web-Cams has made only one offering of common stock. At what price did it sell shares to the market?

Primary Markets and Issuing New Securities

3. Owners of the Internet bargain site FROOGLE.com have decided to take their company public by conducting an initial public offering of common stock. They have agreed with their investment banker to sell 3.3 million shares to investors at an offer price of $14 per share. The underwriting spread is 7 percent.

a. What is the net price that FROOGLE.com will receive for its shares?
b. How much money will FROOGLE.com raise in the offering?
c. How much do FROOGLE.com's investment bankers make on this transaction?

Stock Valuation

6. Argaiv Towers has outstanding an issue of preferred stock with a par value of $100. It pays an annual dividend equal to 8 percent of par value. If the required return on Argaiv preferred stock is 6 percent, and if Argaiv pays its next dividend in one year, what is the market price of the preferred stock today?

Attachments

Solution Preview

Please see the attached file.

Valuation Basics

1. A best selling author decides to cash in on her latest novel by selling the rights to the book's royalties for the next four years to an investor. Royalty payments arrive once per year, starting one year from now. In the first year, the author expects $400,000 in royalties, followed by $300,000, then $100,000 then $10,000 in the three subsequent years. If the investor purchasing the rights to royalties requires a return of 7 percent per year, what should the investor pay?

What the investor should pay is the present value of royalty payments. The discounting rate is given as 7%. We get
Year Royalty Payment (1) Discounting Factor (2) Present Value (1X2)
1 400,000 0.9346 373,832
2 300,000 0.8734 262,032
3 100,000 0.8163 81,630
4 10,000 0.7629 7,629
5 10,000 0.7130 7,130
6 10,000 0.6663 6,663
Total present ...

Solution Summary

The solution explains various questions relating to stock and bond valuation

$2.19