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Chapter 6 Tutorial Questions

This document contains questions and problems about valuing bonds and shares using intrinsic value calculations. It asks about intrinsic value, growth rates, required returns, and cash flows as they relate to using models like constant growth and dividend discount to determine the theoretical value of various securities.

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Eritabeta Tony
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31 views

Chapter 6 Tutorial Questions

This document contains questions and problems about valuing bonds and shares using intrinsic value calculations. It asks about intrinsic value, growth rates, required returns, and cash flows as they relate to using models like constant growth and dividend discount to determine the theoretical value of various securities.

Uploaded by

Eritabeta Tony
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 6: Valuation of bonds and shares

End of Chapter Questions:

6.5 What is the intrinsic value of a security and why do we focus on intrinsic values in
finance?

6.12 If dividends are paid semi-annually on a preference share and we adjust the required
return to reflect this, is the intrinsic value any different to a share with the same total
dividend paid annually and an annual required return? Use an annual dividend of $1 and
a required return of 9% to demonstrate your understanding.

6.18 What is the most difficult aspect of valuing ordinary shares?

6.19 Explain why you should not use a PE multiple from the financial press to value a share.

6.20 Is there a theoretical relationship between the constant growth model and the PE method
of valuation? What does the relationship depend on?

Financial Problems:
6.1 You have been offered an investment with the following cash flows:
End year $
1 50
2 80
3 300
If you have a discount rate of 7% p.a., how much is this investment worth to you?

6.7 Vision Systems bonds have a face value of $500 000, a coupon of 7.75% and 7 years to
maturity. Coupons are paid semi-annually. If your required return is 11% p.a., what is the
intrinsic value of this bond?

6.17 Calliope Ltd has been listed for the last 20 years. Over this time, investors have enjoyed a
steady stream of dividends. You expect the current annual growth rate of about 1% to be
maintained into the foreseeable future. Dividends are paid semi-annually and the
dividend paid last week was 13c per share. If your required return for Calliope is 5% p.a.,
what is the intrinsic value of a share?

6.18 You have forecast an annual growth rate of 3% for MOP Ltd. Dividends are paid
annually and the last dividend was 50c. If your required return is 12% p.a., what is the
value of an MOP share?
6.20 Shares in Cochlear Ltd have been trading on the ASX for about 12 years. Over that time,
the company has experienced a phenomenal growth rate in dividends of about 25% p.a.
This growth has been achieved by expanding into overseas markets and, to a lesser
extent, by new product development. You expect that growth in US sales will support the
current growth in dividends for a further 5 years. After that time, you expect dividend
growth to slow to about 10% p.a. and the new growth rate to be maintained for many
years to come. Total dividends last year were 51 cents. The next dividend payment is due
6 months from now and dividends are paid semi-annually. What is the intrinsic value of a
Cochlear share if your required rate of return is 16% p.a.?

6.27 (a) The last dividend on an ordinary share was $0.50. You expect the dividends to grow
at 2% per annum for the foreseeable future. What is the value of the share if the
required return is 10% p.a.?

(b) The next dividend on an ordinary share is expected to be $0.50. You expect the
dividends to grow at 2% per annum for the foreseeable future. What is the value of
the share if the required return is 10% p.a.?

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