FIN 300 Exam 2 UKY

Bond value is determined by the ________ _____ of the coupon payments plus the _______ _____ of the par (face) value

Present value

Discount bond

Price < Par value

Current Yield

annual coupon ÷ price

Coupon rate

annual interest rate

Interest rates are ________ related to present values (i.e., prices) of bonds.

inversely

Yield to Maturity (YTM)

market interest rate (= required return) on a bond

When the YTM = coupon, the bond trades at _________.

par

When the YTM < coupon, the bond trades at a ___________

premium

premium bond

price > par value

Currently, a firm has an EPS of $2.08 and a benchmark PE of 12.7. Earnings are expected to grow by 3.8 percent annually. What is the estimated current stock price?

$26.42

Bond

a debt security issued by companies or government agencies

Home Products common stock sells for $36.84 a share and has a market rate of return of 15.8 percent. The company just paid an annual dividend of $1.61 per share. What is the dividend growth rate?

10.95 percent

KNJ Companies is preparing to pay annual dividends of $1.48, $1.60, and $1.75 a share over the next three years, respectively. After that, the annual dividend will be $1.90 per share indefinitely. What is this stock worth to you per share if you require a return of 14.6 percent?

$12.32

Sew 'N More just paid an annual dividend of $1.42 a share. The firm plans to pay annual dividends of $1.45, $1.50, and $1.53 over the next 3 years, respectively. After that time, the dividends will be held constant at $1.60 per share. What is this stock worth today at a discount rate of 11.7 percent?

$13.41

A firm has a current EPS of $1.63 and a benchmark PE of 11.7. Earnings are expected to grow 2.6 percent annually. What is the target stock price in one year?

$19.57

E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $10 in perpetuity, beginning 11 years from now. If the market requires a 12 percent return on this investment, how much does a share of preferred stock cost today?

$26.83

Your local toy store just announced its annual dividend will be $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 a share in Year 3. At a discount rate of 18 percent, what should one share sell for today?

$33.54

Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected at $3.80, $4.10, and $4.25 over the next three years, respectively. Beginning four years from now, the dividend is expected to increase by 3.25 percent annually. What is one share of this stock worth today at a discount rate of 12.5 percent?

$42.92

Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $8.90, but management expects to reduce the payout by 4 percent per year indefinitely. If you require a return of 14 percent on this stock, what will you pay for a share today?

$47.47

Roy's Welding common stock sells for $58.49 a share and pays an annual dividend that increases by 1.3 percent annually. The market rate of return on this stock is 12.6 percent. What is the amount of the last dividend paid?

$6.52

AB Co. stock pays a constant annual dividend, sells for $56.07 a share, and has a market rate of return of 12.2 percent. What is the amount of the next annual dividend?

$6.84

A7X Corp. just paid a dividend of $1.40 per share. The dividends are expected to grow at 35 percent for the next 6 years and then level off to a growth rate of 7 percent indefinitely. If the required return is 15 percent, what is the price of the stock today?

$64.29

Debt

- Not an ownership interest - Creditors do not have voting rights - Interest is considered a cost of doing business and is tax deductible=> a "benefit of debt" - Creditors have legal recourse if interest or principal payments are missed ("default") - Excess debt can lead to financial distress and bankruptcy

Equity

- Ownership interest - Common stockholders vote for the board of directors and other issues - Dividends are not considered a cost of doing business and are not tax deductible - Dividends are not a liability of the firm, and stockholders have no legal recourse if dividends are not paid - An all equity firm cannot go bankrupt merely due to debt since it has no debt

The next dividend payment by Savitz, Inc., will be $1.84 per share. The dividends are anticipated to maintain a growth rate of 5 percent forever. If the stock currently sells for $36 per share, what is the required return?

10.11%

The current dividend yield on CJ's common stock is 1.89 percent. The company just paid an annual dividend of $1.56 and announced plans to pay $1.70 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?

10.86 percent

Bedeker, Inc., has an issue of preferred stock outstanding that pays a $3.35 dividend every year in perpetuity. If this issue currently sells for $90 per share, what is the required return?

3.72%

The next dividend payment by Savitz, Inc., will be $1.76 per share. The dividends are anticipated to maintain a growth rate of 7 percent forever. The stock currently sells for $34 per share. What is the dividend yield? What is the expected capital gains yield?

5.17 % 7%

Bond Value Equation

Given on equation sheet

Bond prices and market interest rates move in the ___________ direction

Opposite

Primary Principle

Value of financial securities = PV of expected future cash flows

You can use the price of a bond to estimate its _____ and use that to find the price of another _____ of similar risk.

YTM, bond

Yield to maturity

current yield + capital gains yield

When the YTM > coupon, the bond trades at a _________.

discount

Par value (face value)

principal repaid, usually $1,000 per bond

Bonds of similar ____ will be priced to yield the ____ return.

risk, same

Maturity date

specified date on which principal is repaid

Coupon payment

stated interest payment