Reference no: EM131175644

Question 1: (Bond valuation) Calculate the value of a bond that matures in 12 years and has $1,000 par value. The annual coupon interest rate is 9 percent and the market's required yield to maturity on a comparable-risk bond is 12 percent. Round to the nearest cent.

Question 2: (Bond valuation) Enterprise, Inc. bonds have an annual coupon rate of 11 percent. The interest is paid semiannually and the bonds mature in 9 years. Their par value is $1,000. If the market's required yield to maturity on a comparable-risk bond is 14 percent, what is the value of the bond? What is its value if the interest is paid annually and semiannually? (Round to the nearest cent.)

Question 3: (Yield to maturity) The market price is $750 for a 20-year bond ($1,000 par value) that pays 9 percent annual interest, but makes interest payments on a semiannual basis (4.5 percent semiannually). What is the bond's yield to maturity?

Question 4: (Yield to maturity) A bond's market price is $950. It has a $1,000 par value, will mature in 14 years, and has a coupon interest rate of 8 percent annual interest, but makes its interest payments semiannually. What is the bond's yield to maturity? What happens to the bond's yield to maturity if the bond matures in 28 years? What if it matures in 7 years?

Question 5: (Bond valuation relationships) Arizona Public Utilities issued a bond that pays $70 in interest, with a $1,000 par value and matures in 25 years. The markers required yield to maturity on a comparable-risk bond is 8 percent.(Round to the nearest cent.)For questions with two answer options (e.g. increase/decrease) choose the best answer and write it in the answer block.

Questions-

a. What is the value of the bond if the markers required yield to maturity on a comparable-risk bond is 8 percent?

b. What is the value of the bond if the markers required yield to maturity on a comparable-risk bond increases to 11 percent?

c. What is the value of the bond if the market's required yield to maturity on a comparable-risk bond decreases to 7 percent?

d. The change in the value of a bond caused by changing interest rates is called interest-rate risk. Based on the answer: in parts b and c, a decrease in interest rates (the yield to maturity) will cause the value of a bond to (increase/decrease):

e. Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 8 percent? $ 960.07 Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 11 percent?

f. Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 7 percent?

g. From the findings in part e, we can conclude that a bondholder owning a long-term bond is exposed to (more/less) interest-rate risk than one owning a short-term bond.

Question 6: (Measuring growth) If Pepperdine, Inc.'s return on equity is 14 percent and the management plans to retain 55 percent of earnings for investment purposes, what will be the firm's growth rate?

Question 7: (Common stock valuation) The common stock of NCP paid $1.29 in dividends last year. Dividends are expected to grow at an annual rate of 6.00 percent for an indefinite number of years. (Round to the nearest cent.)

a. If your required rate of return is 8.70 percent, the value of the stock for you is:

b. You (should/should not) make the investment if your expected value of the stock is (greater/less) than the current market price because the stock would be undervalued.                               

Question 8: (Measuring growth) Given that a firm's return on equity is 22 percent and management plans to retain 37 percent of earnings for investment purposes, what will be the firm's growth rate? If the firm decides to increase its retention rate, what will happen to the value of its common stock? (Round to two decimal places.)

Question 9: (Relative valuation of common stock) Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions:

• the investor's required rate of return is 13 percent,
• the expected level of earnings at the end of this year (E1) is $8,
• the firm follows a policy of retaining 40 percent of its earnings,
• the return on equity (ROE) is 15 percent, and
• similar shares of stock sell at multiples of 8.571 times earnings per share.

Now show that you get the same answer using the discounted dividend model.

Question 10: (Preferred stock valuation) Calculate the value of a preferred stock that pays a dividend of $8.00 per share when the market's required yield on similar shares is 13 percent. (Round to the nearest cent.)

Course Textbook- Titman, S., Keown, A. J., & Martin J. D. (2014). Financial management: Principles and applications (12th ed.). Upper Saddle River, NJ: Pearson.