Scribd
Upload
250 views2 pages

1 Valuation of Long Term Secs

1. Suresafe Fire Insurance Company holds bonds issued by Gonzalez Electric Company that pay 10% annual interest and mature in 3 years. For Suresafe to realize a 14% annual return on the sale of the bonds, they should be able to sell each bond for $__. 2. If the Gonzalez Electric Company bonds paid interest semiannually instead of annually, the price Suresafe should be able to realize on the sale of each bond would be $__. 3. Superior Cement Company has preferred stock with an $100 face value that currently pays 8% dividends but has a required 10% yield. If interest rates rise and require a 12% yield, the market price per share of

Uploaded by

Hamza Bin Tahir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
250 views2 pages

1 Valuation of Long Term Secs

1. Suresafe Fire Insurance Company holds bonds issued by Gonzalez Electric Company that pay 10% annual interest and mature in 3 years. For Suresafe to realize a 14% annual return on the sale of the bonds, they should be able to sell each bond for $__. 2. If the Gonzalez Electric Company bonds paid interest semiannually instead of annually, the price Suresafe should be able to realize on the sale of each bond would be $__. 3. Superior Cement Company has preferred stock with an $100 face value that currently pays 8% dividends but has a required 10% yield. If interest rates rise and require a 12% yield, the market price per share of

Uploaded by

Hamza Bin Tahir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

1.

Gonzalez Electric Company has outstanding a 10 percent bond issue with a face value
of $1,000 per bond and three years to maturity. Interest is payable annually. The
bonds are privately held by Suresafe Fire Insurance Company. Suresafe wishes to sell
the bonds, and is negotiating with another party. It estimates that, in current market
conditions, the bonds should provide a (nominal annual) return of 14 percent. What
price per bond should Suresafe be able to realize on the sale?

2. What would be the price per bond in Problem 1 if interest payments were made
semiannually?

3. Superior Cement Company has an 8 percent preferred stock issue outstanding, with
each share having a $100 face value. Currently, the yield is 10 percent. What is the
market price per share? If interest rates in general should rise so that the required
return becomes 12 percent, what will happen to the market price per share?

4. The stock of the Health Corporation is currently selling for $20 a share and is
expected to pay a $1 dividend at the end of the year. If you bought the stock now and
sold it for $23 after receiving the dividend, what rate of return would you earn?

5. Delphi Products Corporation currently pays a dividend of $2 per share, and this
dividend is expected to grow at a 15 percent annual rate for three years, and then at a
10 percent rate for the next three years, after which it is expected to grow at a 5
percent rate forever. What value would you place on the stock if an 18 percent rate of
return was required?

6. North Great Timber Company will pay a dividend of $1.50 a share next year. After
this, earnings and dividends are expected to grow at a 9 percent annual rate
indefinitely. Investors currently require a rate of return of 13 percent. The company is
considering several business strategies and wishes to determine the effect of these
strategies on the market price per share of its stock.
a. Continuing the present strategy will result in the expected growth rate and
required rate of return stated above.
b. Expanding timber holdings and sales will increase the expected dividend
growth rate to 11 percent but will increase the risk of the company. As a
result, the rate of return required by investors will increase to 16 percent.
c. Integrating into retail stores will increase the dividend growth rate to 10
percent and increase the required rate of return to 14 percent.
From the standpoint of market price per share, which strategy is best?

7. Wayne’s Steaks, Inc., has a 9 percent, noncallable, $100-par-value preferred stock


issue outstanding. On January 1 the market price per share is $73. Dividends are paid
annually on December 31. If you require a 12 percent annual return on this
investment, what is this stock’s intrinsic value to you (on a per share basis) on January
1?

8. The 9-percent-coupon-rate bonds of the Melbourne Mining Company have exactly


15 years remaining to maturity. The current market value of one of these $1,000-par
value bonds is $700. Interest is paid semiannually. Melanie Gibson places a nominal
annual required rate of return of 14 percent on these bonds. What dollar intrinsic
value
should Melanie place on one of these bonds (assuming semiannual discounting)?
9. Just today, Fawlty Foods, Inc.’s common stock paid a $1.40 annual dividend per share
and had a closing price of $21. Assume that the market’s required return, or
capitalization rate, for this investment is 12 percent and that dividends are expected to
grow at a constant rate forever.
a. Calculate the implied growth rate in dividends.
b. What is the expected dividend yield?
c. What is the expected capital gains yield?

10. Burp-Cola Company just finished making an annual dividend payment of $2 per share
on its common stock. Its common stock dividend has been growing at an annual rate
of
10 percent. Kelly Scott requires a 16 percent annual return on this stock. What
intrinsic
value should Kelly place on one share of Burp-Cola common stock under the
following
three situations?

a. Dividends are expected to continue growing at a constant 10 percent annual rate.


b. The annual dividend growth rate is expected to decrease to 9 percent and to remain
constant at that level.
c. The annual dividend growth rate is expected to increase to 11 percent and to remain
constant at the level.

11. Snyder Computer Chips Inc. is experiencing a period of rapid growth. Earnings and
dividends are expected to grow at a rate of 15 percent during the next 2 years, at 13
percent in the third year, and at a constant rate of 6 percent thereafter. Snyder’s last
dividend was $1.15, and the required rate of return on the stock is 12 percent.
a. Calculate the value of the stock today.
b. Calculate Pˆ1 and Pˆ2.
c. Calculate the dividend yield and capital gains yield for Years 1, 2, and 3.

You might also like