Exam 10: Valuation Concepts

A share of perpetual preferred stock pays an annual dividend of $6 per share.If investors require a 12 percent rate of return,what should be the price of this preferred stock?

Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years.Your expectations are that you will not receive a dividend at the end of Year 1,but you will receive a dividend of $9.25 at the end of Year 2.In addition,you expect to sell the stock for $150 at the end of Year 2.If your expected rate of return is 16 percent,how much should you be willing to pay for this stock today?

JRJ Corporation recently issued 10-year bonds at a price of $1,000.These bonds pay $60 in interest each six months.Their price has remained stable since they were issued,i.e. ,they still sell for $1,000.Due to additional financing needs,the firm wishes to issue new bonds that would have a maturity of 10 years,a par value of $1,000,and pay $40 in interest every six months.If both bonds have the same yield,how many new bonds must JRJ issue to raise $2,000,000 cash?

Garcia Inc.has a current dividend of $3.00 per share (D₀ = $3.00).Analysts expect that the dividend will grow at a rate of 25 percent a year for the next three years,and thereafter it will grow at a constant rate of 10 percent a year.The company's cost of equity capital is estimated to be 15 percent.What is the current stock price of Garcia Inc.?

If interest rates remain below the coupon on a bond,the bond will sell at a premium right up through its maturity.The maturity value will include the bond's face value plus a maturity premium equal to the face value times the percentage of the bond's life during which it sold for a premium.

A share of stock has a dividend of D₀ = $5.The dividend is expected to grow at a 20 percent annual rate for the next 10 years,then at a 15 percent rate for 10 more years,and then at a long-run normal growth rate of 10 percent forever.If investors require a 10 percent return on this stock,what is its current price?

Assume that the State of Florida sold tax-exempt,zero coupon bonds with a $1,000 maturity value 5 years ago.The bonds had a 25-year maturity when they were issued,and the interest rate built into the issue was 8 percent,compounded semiannually.The bonds are now callable at a premium of 4 percent over the accrued value.What effective annual rate of return would an investor who bought the bonds when they were issued and who still owns them earn if they were called today?

The value of a financial asset is positively related to the size of the cash flows and the discount rate appropriate for the riskiness of the cash flows.

Worldwide Inc. ,a large conglomerate,has decided to acquire another firm.Analysts are forecasting a period (2 years)of extraordinary growth (20 percent),followed by another 2 years of unusual growth (10 percent),and finally a normal (sustainable)growth rate of 6 percent annually.If the last dividend was D₀ = $1.00 per share and the required return is 8 percent,what should the market price be today?

Regardless of what interest rates do in the future,the bond's price will approach the par value of the bond as it nears its maturity date.

A four-year,zero-coupon Treasury bond sells at a price of $762.8952.A three-year,zero-coupon Treasury bond sells at a price of $827.8491.Assuming the pure expectations theory is correct,what does the market believe the price of one-year,zero-coupon bonds will be in three years?

Recently,Ohio Hospitals Inc.filed for bankruptcy.The firm was reorganized as American Hospitals Inc. ,and the court permitted a new indenture on an outstanding bond issue to be put into effect.The issue has 10 years to maturity and a coupon rate of 10 percent,paid annually.The new agreement allows the firm to pay no interest for 5 years.Then,interest payments will be resumed for the next 5 years.Finally,at maturity (Year 10),the principal plus the interest that was not paid during the first 5 years will be paid.However,no interest will be paid on the deferred interest.If the required return is 20 percent,what should the bonds sell for in the market today?

If interest rates fall from 8 percent to 7 percent,which of the following bonds will have the largest percentage increase in its value?

All else equal,higher expected cash flows associated with a financial asset results in a higher required rate of return on that financial asset.

All else equal,a higher required rate of return on a financial asset results in a higher price for that asset.

NYC Company has decided to make a major investment.The investment will require a substantial early cash outflow,and inflows will be relatively late.As a result,it is expected that the impact on the firm's earnings for the first 2 years will cause a negative growth of 5 percent annually.Further,it is anticipated that the firm will then experience 2 years of zero growth,after which it will begin a positive annual sustainable growth of 6 percent.If the firm's required return is 10 percent and its last dividend,D₀,was $2 per share,what should be the current price per share?

Which of the following statements is correct?

Cold Boxes Ltd.has 100 bonds outstanding (maturity value = $1,000).The required rate of return on these bonds is currently 10 percent,and interest is paid semiannually.The bonds mature in 5 years,and their current market value is $768 per bond.What is the annual coupon interest rate?

Ignoring default risk,since the coupon payments and maturity value of bonds are fixed the price of a bond does not change over time.

You intend to purchase a 10-year,$1,000 face value bond that pays interest of $60 every 6 months.If your simple annual required rate of return is 10 percent with semiannual compounding,how much should you be willing to pay for this bond?