首 页 课程负责人情况 教师队伍 课程描述 教学效果 教学录像 网络教学 第二课堂 在线测试 师生互动 申请书
  教学大纲
  电子教案
  样 卷
  作 业
  习题集
  参考书目
  教学案例
 
 
Chapter 10

Questions and Problems

Discussion Questions

10-1.

How is valuation of any financial asset related to future cash flows? 

 

 

10-2.

Why might investors demand a lower rate of return for an investment in Exxon as compared to Armco Steel or Boston Chicken, Inc.? 

 

 

10-3.

What are the three factors that influence the required rate of return by investors? 

 

 

10-4.

If inflationary expectations increase, what is likely to happen to yield to maturity on bonds in the marketplace? What is also likely to happen to the price of bonds? 

 

 

10-5.

Why is the remaining time to maturity an important factor in evaluating the impact of a change in yield to maturity on bond prices?

 

10-6.

What are the three adjustments that have to be made in going from annual to semiannual bond analysis?.

 

 

10-7.

Why is a change in required yield for preferred stock likely to have a greater impact on price than a change in required yield for bonds? 

 

 

10-8.

What type of dividend pattern for common stock is similar to the dividend payment for preferred stock? 

 

 

10-9.

What two conditions must be met to go from Formula 10-8 to Formula 10-9 in using the dividend valuation model?

 

 

10-10.

What two components make up the required rate of return on common stock? 

 

10-11.

What factors might influence a firm's price-earnings ratio? 

 

 

10-12.

How is the supernormal growth pattern likely to vary from the normal, constant growth pattern? 

 

 

10-13.

What approaches can be taken in valuing a firm's stock when there is no cash dividend payment? 

Problems

 

(For the first 11 bond problems, assume interest payments are on an annual basis.) 

10-1.

The Lone Star Company has $1,000 par value bonds outstanding at 9 percent interest. The bonds will mature in 20 years. Compute the current price of the bonds if the present yield to maturity is: 

a.   6 percent.

b.   8 percent.

c.   12 percent. 

 

 

10-2.

Applied Software has $1,000 par value bonds outstanding at 12 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is: 

a.   11 percent.

b.   13 percent.

c.   16 percent. 

 

10-3.

Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 10 percent annual interest. The current yield to maturity on such bonds in the market is 7 percent. Compute the price of the bonds for these maturity dates: 

a.   30 years.

b.   15 years.

c.   1 year. 

 

10-4.

The Hartford Telephone Company has a $1,000 par value bond outstanding that pays 11 percent annual interest. The current yield to maturity on such bonds in the market is 14 percent. Compute the price of the bonds for these maturity dates: 

a.   30 years.

b.   15 years.

c.   1 year. 

 

 

10-5.

For Problem 4 graph the relationship in a manner similar to the bottom half. Bond maturity effect of Figure 10-2 in the chapter. Also explain why the pattern of price change takes place. 

 

 

10-6.

Using Table 10-2 

a.   Assume the interest rate in the market (yield to maturity) goes down to 8% for the 10% bonds. Using column 2, indicate what the bond price will be with a 5-year, a 15-year, and a 30-year time period.

b.   Assume the interest rate in the market (yield to maturity) goes up to 12% for the 10% bonds. Using column 3, indicate what the bond price will be with a 5-year, a 10-year, and a 30-year period.

c.   Based on the information in part a, if you think interest rates in the market are going down, which bond would you choose to own?

d.   Based on information in part b, if you think interest rates in the market are going up, which bond would you choose to own? 

 

10-7.

Ron Rhodes calls his broker to inquire about purchasing a bond of Golden Years Recreation Corporation. His broker quotes a price of $1,170. Ron is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 13 percent interest, and it has 18 years remaining until maturity. The current yield to maturity on similar bonds is 11 percent. 

Do you think the bond is overpriced? Do the necessary calculations. 

 

 

10-8.

Tom Cruise Lines, Inc., issued bonds 5 years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 12 percent. This return was in line with the required returns by bondholders at that point as described below: 

Real rate of return............................................         3%

Inflation premium.............................................         5

Risk premium..................................................         4

  Total return..................................................       12% 

Assume that five years later the inflation premium is only 3 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 20 years remaining until maturity. 

Compute the new price of the bond. 

 

10-9.

Further analysis of problem 8: 

a.   Find the present value of 2 percent * $1,000 (or $20) for 20 years at 10 percent. The $20 is assumed to be an annual payment.

b.   Add this value to $1,000.

c.   Explain why the answer to problem 7b and problem 6 are basically the same. (There is a slight difference due to rounding in the tables.) 

 

10-10.

Wilson Oil Company issued bonds five years ago at $1,000 per bond. These bonds had a 25 year life when issued and the annual interest payment was then 8 percent. This return was in line with the required returns by bondholders at that point in time as described below: 

Real rate of return............................................         2%

Inflation premium.............................................         3

Risk premium..................................................         3

  Total return..................................................         8% 

Assume that 10 years later, due to bad publicity, the risk premium is now 6 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 15 years remaining until maturity. Compute the new price of the bond. 

 

 

10-11.

Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 4 percent annual interest and has 16 years remaining to maturity. The current yield to maturity on similar bonds is 10 percent.

a.   What is the current price of the bonds?

b.   By what percent will the price of the bonds increase between now and maturity?

c.   What is the annual compound rate of growth in the value of the bonds? (An approximate answer is acceptable.) 

 

10-12.

Bonds issued by the Coleman Manufacturing Company have a par value of $1,000, which, of course, is also the amount of principal to be paid at maturity. The bonds are currently selling for $850. They have 10 years remaining to maturity. The annual interest payment is 8 percent ($80). 

Compute the approximate yield to maturity, using Formula 10-2. 

 

10-13.

Bonds issued by the Tyler Food Corporation have a par value of $1,000, are selling for $1,080, and have 20 years remaining to maturity. The annual interest payment is 12.5 percent ($125). 

Compute the approximate yield to maturity, using Formula 10-2. 

 

10-14.

Optional—for Problem 13, use the techniques in Appendix 10A to combine a trial-and-error approach with interpolation to find a more exact answer. You may choose to use a hand-held calculator instead. 

 

 

(For the next two problems, assume interest payments are on a semiannual basis.) 

10-15.

Heather Smith is considering a bond investment in Locklear Airlines. The $1,000 par value bonds have a quoted annual interest rate of 9 percent and interest is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 15 years to maturity. Compute the price of the bonds based on semiannual analysis. 

10-16.

You are called in as a financial analyst to appraise the bonds of Virginia Slim's Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 13 percent, which is paid semiannually. The yield to maturity on the bonds is 10 percent annual interest. There are 25 years to maturity. 

a.   Compute the price of the bonds based on semiannual analysis.

b.   With 20 years to maturity, if yield to maturity goes down substantially to 8 percent, what will be the new price of the bonds? 

 

10-17.

The preferred stock of Denver Savings and Loan pays an annual dividend of $5.60. It has a required rate of return of 8 percent. Compute the price of the preferred stock. 

 

 

10-18.

X-Tech Company issued preferred stock many years ago. It carries a fixed dividend of $5.00 per share. With the passage of time, yields have soared from the original 5 percent to 12 percent (yield is the same as required rate of return). 

a.   What was the original issue price?

b.   What is the current value of this preferred stock?

c.   If the yield on the Standard & Poor's Preferred Stock Index declines, how will the price of the preferred stock be affected? 

 

 

10-19.

Grant Hillside Homes, Inc., has preferred stock outstanding that pays an annual dividend of $9.80. Its price is $110. What is the required rate of return (yield) on the preferred stock? 

 

 

 

(All of the following problems pertain to the common stock section of the chapter.) 

10-20.

Stagnant Iron and Steel currently pays a $4.20 annual cash dividend (D0). They plan to maintain the dividend at this level for the foreseeable future as no future growth is anticipated. 

Of the required rate of return by common stockholders (Ke) is 12 percent, what is the price of the common stock? 

 

 

10-21.

Laser Optics will pay a common stock dividend of $1.60 at the end of the year (D1). The required rate of return on common stick (Ke) is 13 percent. The firm has a constant growth rate (g) of 7 percent. 

Compute the current price of the stock (P0).
 

10-22.

Ecology Labs, Inc., will pay a dividend of $3 per share in the next 12 months (D1). The required rate of return (Ke) is 10 percent and the constant growth rate is 5 percent. 

a.   Compute P0.
(In the remaining questions for problem 19 all variables remain the same except the one specifically changed. Each question is independent of the others.)

b.   Assume Ke, the required rate of return, goes up to 12 percent, what will be the new value of P0?

c.   Assume the growth rate (g) goes up to 7 percent, what will be the new value of P0?

d.   Assume D1 is $3.50, what will be the new value of P0? 

 

10-23.

Sterling Corp. paid a dividend of $.80 last year. Over the next 12 months, the dividend is expected to grow at a rate of 10 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required rate of return (Ke) is 14 percent. 

Compute the price of the stock (P0). 

 

 

10-24.

Justin Cement Company has had the following pattern of earnings per share over the last five years: 

       Year                           Earnings per Share

            1997................................................... $4.00

            1998..................................................... 4.20

            1999..................................................... 4.41

            2000..................................................... 4.63

            2001..................................................... 4.86 

The earnings per share have grown at a constant rate (on a rounded basis) and will continue to do so in the future. Dividends represent 40 percent of earnings. 

Project earnings and dividends for the next year (2002). 

If the required rate of return (Ke) is 13 percent, what is the anticipated stock price (P0) at the beginning of 2002? 

  

10-25.

A firm pays a $3.80 dividend at the end of year one (D1), has a stock price of $50, and a constant growth rate (g) of 4 percent. 

Compute the required rate of return (Ke). 

 

10-26.

A firm pays a $1.50 dividend at the end of year one (D1), has a stock price of $60 (P0), and a constant growth rate (g) of 8 percent. 

a.   Compute the required rate of return (Ke). 

      Indicate whether each of the following changes would make the required rate of return (Ke) go up or down. (Each question is separate from the others. That is, assume only one variable changes at a time.) No actual numbers are necessary. 

b.   The dividend payment increases.

c.   The expected growth rate increases.

d.   The stock price increases. 

 

10-27.

Hunter Petroleum Corporation paid a $2 dividend last year. The dividend is expected to grow at a constant rate of 5 percent over the next three years. The required rate of return is 12 percent (this will also serve as the discount rate in this problem). Round all values to three places to the right of the decimal point where appropriate. 

a.   Compute the anticipated value of the dividends for the next three years. That is, compute D1, D2, and D3; for example, D1 is $2.10 ($2.00 * 1.05).

b.   Discount each of these dividends back to the present at a discount rate of 12 percent and then sum them.

c.   Compute the price of the stock at the end of the third year (P3)     (D4 is equal to D3 times 1.05) 

d.   After your have computed P3, discount it back to the present at a discount rate of 12 percent for three years.

e.   Add together the answers in part b and part d to get P0, the current value of the stock. This answer represents the present value of the first three periods of dividends, plus the present value of the price of the stock after three periods (which, in turn, represents the value of all future dividends).

f.    Use Formula 10-9 to show that it will provide approximately the same answer as part e.  

For Formula 10-9 use D1 = $2.10, Ke = 12 percent, and g = 5 percent. (The slight difference between the answers to part e and part f is due to rounding.)