Exam 10: Valuation Concepts

Fish & Chips Inc.has two bond issues outstanding,and both sell for $701.22.The first issue has a coupon rate of 8 percent and 20 years to maturity.The second has an identical yield to maturity as the first bond,but only 5 years until maturity.Both issues pay interest annually.What is the annual interest payment on the second issue?

The ____ yield is the percentage change in the value of an investment.

The ____ yield is the annual dollar coupon interest paid on a bond divided by the bond's current market price.

Which of the following is not true about bonds? In all of the statements,assume other things are held constant.

All else equal,a higher required rate of return on a firm's stock will result in a higher market price for that firm's stock.

Assume that a 15-year,$1,000 face value bond pays interest of $37.50 every 3 months.If you require a simple annual rate of return of 12 percent,with quarterly compounding,how much should you be willing to pay for this bond?

A share of preferred stock pays a dividend of $0.50 each quarter.If you are willing to pay $20.00 for this preferred stock,what is your simple (not effective)annual rate of return?

Which of the following statements about bonds is most correct?

Which of the following statements is most correct?

Regardless of the size of the coupon payment,the price of a bond moves in the opposite direction from interest rate movements.For example,if interest rates rise,bond prices fall.

Due to a number of lawsuits related to toxic wastes,a major chemical manufacturer has recently experienced a market reevaluation.The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent,with interest being paid semiannually.The required simple rate on this debt has now risen to 16 percent.What is the current value of this bond?

The Textbook Production Company has been hit hard due to increased competition.The company's analysts predict that earnings (and dividends)will decline at a rate of 5 percent annually forever.Assume that r_s = 11 percent and D₀ = $2.00.What will be the price of the company's stock three years from now?

The cash flows associated with common stock are difficult to evaluate due to the uncertainty and variability associated with them.

The last dividend paid by Klein Company was $1.00.Klein's growth rate is expected to be a constant 5 percent for 2 years,after which dividends are expected to grow at a rate of 10 percent forever.Klein's required rate of return on equity (r_s)is 12 percent.What is the current price of Klein's common stock?

Assume that you would like to purchase 100 shares of preferred stock that pays an annual dividend of $6 per share.However,you have limited resources now,so you cannot afford the purchase price.In fact,the best that you can do now is to invest your money in a bank account earning a simple interest rate of 6 percent,but where interest is compounded daily (assume a 365-day year).Because the preferred stock is riskier,it has a required annual rate of return of 12 percent (assume that this rate will remain constant over the next 5 years).For you to be able to purchase this stock at the end of 5 years,how much must you deposit in your bank account today,at t = 0?

The present value of a $1,000 par value bond with an eight percent semi-annual coupon,five years to maturity and a six percent yield to maturity is $1,085.30.

Assume that McDonald's and Burger King have similar $1,000 par value bond issues outstanding.The bonds are equally risky.The Burger King bond has interest payments of $80 paid annually and matures 20 years from today.The McDonald's bond has interest payments of $80 paid semiannually,and it also matures in 20 years.If the simple required rate of return,r_d,is 12 percent,semiannual basis,for both bonds,what is the difference in current market prices of the two bonds?

Tony's Pizzeria plans to issue bonds with a par value of $1,000 and 10 years to maturity.These bonds will pay $45 interest every 6 months.Current market conditions are such that the bonds will be sold to net $937.79.What is the YTM of the issue as a broker would quote it to an investor?

If two firms have the same current dividend and the same expected growth rate,their stocks must sell at the same current price or else the market will not be in equilibrium.

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.