Exam 10: Valuation Concepts

Vogril Company issued 20-year,zero coupon bonds with an expected yield to maturity of 9 percent.The bonds have a par value of $1,000 and were sold for $178.43 each.What is the expected interest expense on these bonds for Year 8?

A discount bond is a bond that sells below its par value.

Suppose you are willing to pay $30 today for a share of stock which you expect to sell at the end of one year for $32.If you require an annual rate of return of 12 percent,what must be the amount of the annual dividend which you expect to receive at the end of Year 1?

An 8 percent annual coupon,noncallable bond has ten years until it matures and a yield to maturity of 9.1 percent.What should be the price of a 10-year bond of equal risk which pays an 8 percent semiannual coupon? Assume both bonds have a maturity value of $1,000.

If the expected rate of return on a stock exceeds the required rate,

One of the basic relationships in interest rate theory is that,other things held constant,for a given change in the required rate of return,the ____ the time to maturity,the ____ the change in price.

Assume that you are considering the purchase of a $1,000 par value bond that pays interest of $70 each six months and has 10 years to go before it matures.If you buy this bond,you expect to hold it for 5 years and then to sell it in the market.You (and other investors)currently require a simple annual rate of 16 percent,but you expect the market to require a rate of only 12 percent when you sell the bond due to a general decline in interest rates.How much should you be willing to pay for this bond?

A share of common stock has just paid a dividend of $2.00.If the expected long-run growth rate for this stock is 15 percent,and if investors require a 19 percent rate of return,what is the price of the stock?

The Satellite Building Company has fallen on hard times.Its management expects to pay no dividends for the next 2 years.However,the dividend for Year 3, ,will be $1.00 per share,and the dividend is expected to grow at a rate of 3 percent in Year 4,6 percent in Year 5,and 10 percent in Year 6 and thereafter.If the required return for Satellite is 20 percent,what is the current equilibrium price of the stock?

Assuming g will remain constant,the dividend yield is a good measure of the required return on a common stock under which of the following circumstances?

Assume that the average firm in your company's industry is expected to grow at a constant rate of 5 percent,and its dividend yield is 4 percent.Your company is about as risky as the average firm in the industry,but it has just developed a line of innovative new products which leads you to expect that its earnings and dividends will grow at a rate of 40 percent [ = D₀(1 + g)= D₀(1.40)] this year and 25 percent the following year,after which growth should match the 5 percent industry average rate.The last dividend paid (D₀)was $2.What is the value per share of your firm's stock?

The prices of outstanding bonds are typically very close to the par value of the bond.

A firm expects to pay dividends at the end of each of the next four years of $2.00,$1.50,$2.50,and $3.50.If growth is then expected to level off at 8 percent,and if you require a 14 percent rate of return,how much should you be willing to pay for this stock?

You are willing to pay $15,625 to purchase a perpetuity which will pay you and your heirs $1,250 each year,forever.If your required rate of return does not change,how much would you be willing to pay if this were a 20-year,annual payment,ordinary annuity instead of a perpetuity?

You have just been offered a $1,000 par value bond for $847.88.The coupon rate is 8 percent,payable annually,and interest rates on new issues of the same degree of risk are 10 percent.You want to know how many more interest payments you will receive,but the party selling the bond cannot remember.Can you determine how many interest payments remain?

According to the basic stock valuation model,the value an investor assigns to a share of stock is dependent upon the length of time the investor plans to hold the stock.

If the required rate of return on a bond is greater than its coupon interest rate (and r_d remains above the coupon rate),the market value of that bond will always be below its par value until the bond matures,at which time its market value will equal its par value.(Accrued interest between interest payment dates should not be considered when answering this question. )

You are the owner of 100 bonds issued by Euler,Ltd.These bonds have 8 years remaining to maturity,an annual coupon payment of $80,and a par value of $1,000.Unfortunately,Euler is on the brink of bankruptcy.The creditors,including yourself,have agreed to a postponement of the next 4 interest payments (otherwise,the next interest payment would have been due in 1 year).The remaining interest payments,for Years 5 through 8,will be made as scheduled.The postponed payments will accrue interest at an annual rate of 6 percent,and they will then be paid as a lump sum at maturity 8 years hence.The required rate of return on these bonds,considering their substantial risk,is now 28 percent.What is the present value of each bond?

The market value of any real or financial asset,including stocks,bonds,or art work,can be found by determining future cash flows and then discounting them back to the present.

Which of the following statements is correct?