BUS 360 Chapter 8,9 HW

Problem 50 Alpha Industries is going to pay $.35, $.50, and $.80 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 this stock worth today at a discount rate of 13.45 percent? $6.20 $9.48 $10.88 $7.61 $5.06

$.35/1.1345 + $.50/1.1345^2 + $.80/1.1345^3 + ($1.25/.1345) / 1.1345^3 = $7.61

Problem 20 A bond with a coupon rate of 6 percent that pays interest semiannually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each. $1,006; $60 $1,060; $30 $1,060; $60 $1,000; $30 $1,000; $60

$1,000; $30

Problem 47 The Merriweather Co. just announced that it will pay a dividend next year of $1.60. The company will then increase its dividend by 10 percent per year for two years after which it will maintain a constant 2 percent dividend growth rate. What is one share worth today at a required rate of return of 14 percent? $21.60 $15.17 $23.14 $23.95 $24.79

$1.60/1.14 + ($1.60 × (1 + .10))/1.14^2 + ($1.60 × (1 + .10)^2)/ 1.14^3 + (($1.60 × (1 + .10)^2 × (1 + .02)) / (.14 - .02)) / 1.14^3 = $15.17

Problem 49 New Corp. last paid a $1.50 per share annual dividend. The company is planning on paying $1.62, $1.68, $1.75, and $1.80 a share over the next four years, respectively. After that the dividend will be a constant $2.00 per share per year. What is the market price of this stock if the market rate of return is 15 percent? $6.00 $8.49 $12.48 $11.57 $9.09

$1.62/1.15 + $1.68/1.15^2 + $1.75/1.15^3 + $1.80/1.15^4 + ($2.00 / .15)/1.15^4 = $12.48

Problem 48 The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20 percent next year and then decreasing the growth rate to a constant 5 percent per year. The company just paid its annual dividend in the amount of $1 per share. What is the current value of a share if the required rate of return is 14 percent? $13.28 $13.42 $13.33 $13.19 $13.24

($1 × (1 +.20))/ 1.14 + ((($ × (1+.20) × (1+.05))/(.14 - .05))/1.14 = $13.33

Problem 41 How much are you willing to pay for one share of stock if the company just paid an annual dividend of $1.03, the dividends increase by 3 percent annually, and you require a rate of return of 15 percent? $8.58 $9.49 $10.40 $8.84 $6.87

(1.03 x 1.03)/(0.15 - 0.03) = $8.84

Problem 29 Last week, Hansen Delivery paid its annual dividend of $1.20 per share. The company has been reducing the dividends by 11 percent each year. How much are you willing to pay to purchase stock in this company if your required rate of return is 14 percent? $15.48 $4.27 $7.63 $9.71 $30.00

(1.20 x (1 + (-0.11))/(0.14 - (-0.11)) = $4.27

Problem 42 Upland Motors recently paid a $1.48 per share annual dividend. Dividends are expected to increase by 2.5 percent annually. What is one share of this stock worth today if the appropriate discount rate is 14 percent? $12.87 $13.04 $14.16 $13.19 $12.25

(1.48 x 1.025)/(0.14 - 0.025) = $13.19

Problem 27 Miller Brothers Hardware paid an annual dividend of $1.60 per share last month. Today, the company announced that future dividends will be increasing by 2.80 percent annually. If you require a 9.0 percent rate of return, how much are you willing to pay to purchase one share of this stock today? $26.53 $58.74 $57.14 $24.93 $28.13

(1.60 x 1.0280)/(0.09 - 0.0280) = $26.53

The outstanding bonds of Winter Time Products provide a real rate of return of 3.50 percent. The current rate of inflation is 2.10 percent. What is the nominal rate of return on these bonds? 5.69 percent 5.60 percent 5.67 percent 5.65 percent 5.62 percent

0.0350 = ((1 + n)/(1.0210) - 1 1.0350 = ((1 + n)/(1.0210) 1.0567 = 1 + n .0567 = n 5.67%

Problem 10 Union Local School District has bonds outstanding with a coupon rate of 4.5 percent paid semiannually and 20 years to maturity. The yield to maturity on these bonds is 3.8 percent and the bonds have a par value of $10,000. What is the dollar price of the bond?

0.038/2 = 0.019 0.045 x 10,000/2 = $225 10,000/(1.019)^10 = 4710.13 (225/0.019) x (1 - 1/(1.019)^10 = 6264.32 4710.13 + 6264.32 = $10,974.45

The yield to maturity on a bond is currently 8.50 percent. The real rate of return is 3.90 percent. What is the rate of inflation? 4.68 percent 4.75 percent 4.54 percent 4.60 percent 4.43 percent

0.0390 = ((1 + 0.085)/(1 + I)) - 1 1.0390 = ((1.085)/(1 + I) (1 + I)(1.0390) = 1.085 1 + I = 1.0443 I = 0.443 4.43%

Problem 22 Consider a bond with a coupon rate of 8 percent that pays semiannual interest and matures in eight years. The market rate of return on bonds of this risk is currently 11 percent. What is the current value of a $1,000 face value bond?

0.11/2 = 0.055 (0.08 x 1000)/2 = 40 1000/(1.055)^16 = 424.58 (40/0.055) x (1-1/(1.055)^16 = 418.49 424.58 + 418.49 = $843.07

Problem 28 Langley Enterprises pays a constant dividend of $1.40 a share. The company announced today that it will continue to do this for another 2 years after which time it will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 6 percent? $3.82 $2.57 $4.05 $2.35 $2.80

1.40/(1.06) + 1.40/(1.06)^2 1.32 + 1.25 = $2.57

Problem 45 Martin's Yachts is expected to pay annual dividends of $1.40, $1.75, and $2.00 a share over the next three years, respectively. After that, the dividend is expected to remain constant. What is the current value per share at a discount rate of 14 percent? $12.22 $13.57 $13.08 $12.82 $13.39

1.40/1.14 + 1.75/1.14^2 + (2.00 + (2.00/0.14))/1.14^3 = $13.57

Problem 40 Rosita's announced that its next annual dividend will be $1.65 a share and all future dividends will increase by 2.5 percent annually. What is the maximum amount you should pay to purchase a share of this stock if you require a 12 percent rate of return? $13.75 $17.80$ 15.46 $16.94 $17.37

1.65/(0.12 - 0.025) = $17.37

Problem 44 Unique Stores common stock pays a constant annual dividend of $1.75 a share. What is the value of this stock at a discount rate of 13.25 percent? $12.50 $13.33 $13.21 $12.88 $14.18

1.75/0.1325 = $13.21

Oil Well Supply offers a 6 percent coupon bond with semiannual payments and a yield to maturity of 6.73 percent. The bonds mature in 8 years. What is the market price per bond if the face value is $1,000? $955.41 $1,321.94 $1,322.48 $1,182.77 $955.95

1000/(1.03365)^16 = 588.88 (30/.03365) x (1 - 1/(1.03365)^16 891.53 x (1-1/1.69815) 891.53 x 0.41112 = 366.53 588.88 + 366.53 = $955.41

Problem 8: Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 25 years to maturity, and a coupon rate of 7.1 percent paid annually. If the yield to maturity is 8.2 percent, what is the current price of the bond?

1000/(1.082)^25 = 139.41 (71/0.082) x (1 - 1/(1.082)^25 139.41 + 745.14 = $884.55

Grand Adventure Properties offers a 6 percent coupon bond with annual payments. The yield to maturity is 4.85 percent and the maturity date is 9 years from today. What is the market price of this bond if the face value is $1,000? $938.94 $759.65 $1,082.29 $1,021.23 $1,096.77

1000/1.0485^9 = 652.96 (60/0.0485) x (1 - 1/(1.0485)^9 1237.11 x (1-1/1.53149) 1237.11 x 429.33 = $1082.29

Problem 43 MJ Enterprises stock traditionally provides an average rate of return of 11.6 percent. The firm's next annual dividend is projected at $2.40 with future increases of 3 percent per year. What price should you pay for this stock is you are satisfied with the firm's average rate of return? $28.74 $22.50 $27.91 $28.89 $21.31

2.40/(0.116 - 0.03) = $27.91

Problem 46 You have decided to purchase shares of GHC but need an expected 12 percent rate of return to compensate for the perceived risk of such ownership. What is the maximum price you should pay per share if the company pays a constant $2.70 annual dividend per share? $23.04 $22.50 $32.67 $34.29 $21.59

2.70/0.12 = $22.50

Problem 9: Yan Yan Corp. has a $3,000 par value bond outstanding with a coupon rate of 5.2 percent paid semiannually and 15 years to maturity. The yield to maturity of the bond is 3.9 percent. What is the dollar price of the bond?

3000/(1.0195)^30 = 1680.75 (78/0.0195) x (1 - 1/(1.0195)^30

Problem 35 Latcher's is a relatively new firm that is still in a period of rapid development. The company plans on retaining all of its earnings for the next six years. Seven years from now, the company projects paying an annual dividend of $.25 a share and then increasing that amount by 3 percent annually thereafter. To value this stock as of today, you would most likely determine the value of the stock _____ years from today before determining today's value. 4 5 6 7 8

6

Problem 37 The closing price of a stock is quoted at 32.08, with a P/E of 21 and a net change of .36. Based on this information, which one of the following statements is correct? The closing price on the previous day was $.36 higher than today's closing price. A dealer will buy the stock at $32.08 and sell it at $32.44 a share. The current earnings per share equal $32.08 / 21 + $.36. The current stock price is equivalent to 21 years of the firm's current earnings per share. The earnings per share have increased by $.36 this year.

The current stock price is equivalent to 21 years of the firm's current earnings per share.

Assuming semiannual compounding, what is the price of a zero coupon bond with 16 years to maturity paying $1,000 at maturity if the YTM is (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.): a. 8 percent b. 12 percent c. 16 percent

a. 1000/(1 + .08 /2)^32 = $285.06 b. 1000/(1 + .12 /2)^32 = $154.96 c. 1000/(1 + .16 /2)^32 = $85.20

Problem 31 The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield. current total dividend capital gains earnings

capital gains

Problem 13 The stated interest payment, in dollars, made on a bond each period is called the bond's: coupon. face value. maturity. yield to maturity. coupon rate.

coupon

Problem 17 The annual interest paid by a bond divided by the bond's face value is called the: coupon. face value. maturity. yield to maturity. coupon rate.

coupon rate.

Problem 19 A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond. par discount premium zero coupon floating rate

discount

Problem 21 The market price of a bond increases when the: face value decreases. coupon rate decreases. discount rate decreases. par value decreases. coupon is paid annually rather than semiannually.

discount rate decreases.

Problem 30 Next year's annual dividend divided by the current stock price is called the: yield to maturity. total yield. dividend yield. capital gains yield. earnings yield.

dividend yield.

Problem 38 A forward PE is generally based on the projected: average earnings for the next five years. average earnings for the next three years. earnings for the upcoming quarter. earnings for the next year. stock price in one year.

earnings for the next year.

Problem 25 The interest paid on any municipal bond is: free of default risk. subject to default risk and is exempt from state income taxation. free of both default risk and federal income taxation. exempt from federal income taxation and may or may not be exempt from state taxation. taxable at the federal level and tax exempt at the state and local level.

exempt from federal income taxation and may or may not be exempt from state taxation.

Problem 14 The principal amount of a bond that is repaid at the end of the loan term is called the bond's: coupon. face value. maturity. yield to maturity. coupon rate.

face value.

Problem 33 In the formula, P3 = Div / R - g, the dividend is for period: two. five. four. three. one.

four.

Problem 36 Which one of these factors generally has the greatest impact on a firm's PE ratio? required rate of return current dividends future opportunities the overall risk level of the current firm depreciation method used by the firm

future opportunities

Problem 15 The specified date on which the principal amount of a bond is repaid is called the bond's: coupon. face value. maturity. yield to maturity. coupon rate.

maturity.

Problem 18 A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____ bond. par value discount premium zero coupon floating rate

par value

Problem 32 If a stock pays a constant annual dividend then the stock can be valued using the: fixed coupon bond present value formula. present value of an annuity due formula. payout ratio formula. present value of an ordinary annuity formula. perpetuity present value formula.

perpetuity present value formula.

Problem 39 Which one of these stock valuation methods is used for a non-dividend paying firm that is experiencing accounting losses? price-earnings ratio constant-dividend model price-sales ratio differential-growth model constant-growth model

price-sales ratio

A bond that pays interest annually yielded 7.75 percent last year. The inflation rate for the same period was 5.80 percent. What was the actual real rate of return on this bond for last year? 2.01 percent 1.84 percent 5.80 percent 1.95 percent 5.88 percent

r = ((1 + 0.0775)/(1 + 0.0580)) - 1 r = 1.84%

Problem 34 The underlying assumption of the dividend growth model is that a stock is worth: the same amount to every investor regardless of their desired rate of return. the present value of the future income that the stock is expected to generate. an amount computed as the next annual dividend divided by the market rate of return. the same amount as any other stock that pays the same current dividend and has the same required rate of return. an amount computed as the next annual dividend divided by the required rate of return.

the present value of the future income that the stock is expected to generate.

Problem 26 Rosina purchased a 15-year bond at par value when it was initially issued. The bond has a coupon rate of 7 percent and matures 13 years from now. If the current market rate for this type and quality of bond is 7.5 percent, then Rosina should expect: the bond issuer to increase the amount of all future interest payments. the yield to maturity to remain constant due to the fixed coupon rate. to realize a capital loss if she sold the bond at today's market price. today's market price to exceed the face value of the bond. the current yield today to be less than 7 percent.

to realize a capital loss if she sold the bond at today's market price.

Problem 16 The rate of return required by investors in the market for owning a bond is called the: coupon. face value. maturity. yield to maturity. coupon rate.

yield to maturity.

Problem 12 A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond. Treasury municipal floating-rate junk zero coupon

zero coupon