Exam 10: Valuation Concepts

A bond is more likely to be called when market interest rates decline.

An increase in a firm's expected growth rate would normally cause the firm's required rate of return to

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?

A 20-year original maturity bond with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates.)

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?

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.

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?

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

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

Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40.If you require a 10 percent simple yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

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 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 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?

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?

If two bonds have the same maturity and the same expected rate of return, but one has a higher coupon, the price of the low coupon bond will be more affected by a given change in interest rates.

A share of preferred stock pays a quarterly dividend of $2.50.If the price of this preferred stock is currently $50, what is the simple annual rate of return?

Assume that you can purchase a 15-year, $1,000 face value bond which pays interest on a semiannual basis, for $1,324.23.If the market's effective annual required rate of return is 8.16 percent (or 4 percent semi-annually), how much interest does this bond pay each year?

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?

Your client has been offered a 5-year, $1,000 par value bond with a 10 percent coupon.Interest on this bond is paid quarterly.If your client is to earn a simple rate of return of 12 percent, compounded quarterly, how much should she pay for the bond?