Exam 10: Valuation Concepts

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 the model below is to give a "reasonable" valuation of a stock, which of the following is not a valid assumption for the model?

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

Which of the following statements is most correct?

You have just purchased a 10-year, $1,000 par value bond.The coupon rate on this bond is 8 percent annually, with interest being paid each 6 months.If you expect to earn a 10 percent simple rate of return on this bond, how much did you pay for it?

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?

The common stock valuation model, as shown below, gives no consideration to expected capital gains.

For bonds, price sensitivity to a given change in interest rates generally increases as years remaining to maturity increases.

A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years.If your simple annual required rate of return is 12 percent with quarterly compounding, how much should you be willing to pay for this bond?

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 price of a 10-year, $1,000 par value bond is $1,158.91.Interest on this bond is paid every six months, and the simple annual yield is 14 percent.Given these facts, what is the annual coupon rate on this bond?

Which of the following statements is correct?

A 15-year zero coupon bond has a yield to maturity of 8 percent and a maturity value of $1,000.What is the amount of tax that an investor in the 30 percent tax bracket would pay during the first year of owning the bond?

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?

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?

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?

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.

You are considering the purchase of a common stock that just paid a dividend of $2.00.You expect this stock to have a growth rate of 30 percent for the next 3 years, then to have a long-run normal growth rate of 10 percent thereafter.If you require a 15 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?

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?