Exam 10: Valuation Concepts

The Hart Mountain Company has recently discovered a new type of kitty litter which is extremely absorbent.It is expected that the firm will experience (beginning now)an unusually high growth rate (20 percent)during the period (3 years)it has exclusive rights to the property where the raw material used to make this kitty litter is found.However,beginning with the fourth year the firm's competition will have access to the material,and from that time on the firm will achieve a normal growth rate of 8 percent annually.During the rapid growth period,the firm's dividend payout ratio (percent of EPS paid as dividends)will be relatively low (20 percent)in order to conserve funds for reinvestment.However,the decrease in growth in the fourth year will be accompanied by an increase in dividend payout to 50 percent.Last year's earnings were E₀ = $2.00 per share,and the firm's required return is 10 percent.What should be the current price of the common stock?

In order to accurately assess the capital structure of a firm,it is necessary to convert its balance sheet figures to a market value basis.KJM Corporation's balance sheet as of January 1,2010 is as follows: The bonds have a 4 percent coupon rate,payable semiannually,and a par value of $1,000.They mature on January 1,2020.The yield to maturity is 12 percent,so the bonds now sell below par.What is the current market value of the firm's debt?

Which of the following statements is most correct?

The coupon rate and the required rate for a specific issue of bonds,such as IBM's 7% bonds that were issued in 2011,both vary over time as economic factors change.

Which of the following statements is correct?

The realized rate of return on a stock is always equal to expected rate of return when the stock is purchased at the current market value.

A $1,000 face value bond with a $100 annual interest payment with five years to maturity (not expected to default)would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were greater than 11%.

Club Auto Parts' last dividend,D₀,was $0.50,and the company expects to experience no growth for the next 2 years.However,Club will grow at an annual rate of 5 percent in the third and fourth years,and,beginning with the fifth year,it should attain a 10 percent growth rate which it will sustain thereafter.Club has a required rate of return of 12 percent.What should be the price per share of Club stock at the beginning of the third year, ?

DAA's stock is selling for $15 per share.The firm's income,assets,and stock price have been growing at an annual 15 percent rate and are expected to continue to grow at this rate for 3 more years.No dividends have been declared as yet,but the firm intends to declare a dividend of = $2.00 at the end of the last year of its supernormal growth.After that,dividends are expected to grow at the firm's normal growth rate of 6 percent.The firm's required rate of return is 18 percent.The stock is

You have just noticed in the financial pages of the local newspaper that you can buy a bond ($1,000 par)for $800.If the coupon rate is 10 percent,with annual interest payments,and there are 10 years to maturity,you should make the purchase if your required return on investments of this type is 12 percent.

Suppose a stock is not currently paying dividends,and its management has announced that it will not pay a dividend for at least 5 years,but that it does expect to start paying dividends sometime in the future.Under these conditions,which of the following statements is correct?

You are contemplating the purchase of a 20-year bond that pays $50 in interest each six months.You plan to hold this bond for only 10 years,at which time you will sell it in the marketplace.You require a 12 percent annual return,but you believe the market will require only an 8 percent return when you sell the bond 10 years hence.Assuming you are a rational investor,how much should you be willing to pay for the bond today?

A share of common stock has a current price of $82.50 and is expected to grow at a constant rate of 10 percent.If you require a 14 percent rate of return,what is the current dividend on this stock?

Due to unfavorable economic conditions,EFB Company's earnings and dividends are expected to remain unchanged for the next 3 years.After 3 years,dividends are expected to grow at a 10 percent annual rate forever.The last dividend was $2.00,and the required rate of return is 20 percent.What should be the current market value of EFB stock?

Which of the following statements is correct?

The total expected future yield on a bond consists of a(n)____ yield which is usually positive and a(n)____ yield which can be positive or negative.

Which of the following statements is correct?

Gourmet Cheese Shoppe opened at the end of 2001.In its first full year of operations,2002,earnings per share (EPS)was $0.26.Four years later,in 2005,EPS was up to $0.38,and 7 years after that,in 2012,EPS was up to $0.535.It appears that the first 4 years represented a supernormal growth situation and since then a more normal growth rate has been sustained.What are the rates of growth for the earlier period and for the later period?

Because short-term interest rates are much more volatile than long-term rates,you would,in the real world,be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

The current market price of Smith Corporation's 10 percent,10-year bonds is $1,297.58.A 10 percent coupon interest rate is paid semiannually,and the par value is equal to $1,000.What is the YTM (stated on a simple,or annual,basis)if the bonds mature 10 years from today?