Problems: Easy Problems 1-6 • 5-1 Bond Valuation with Annual payments Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds? 80*7.1607+1000*.3555 = $928 • 5-2 Yield to Maturity for Annual payments Wilson Wonders’s bonds have 12 years remaining to maturity.
8% b. 8% 2. a. A $1,000 bond has a 7.5 percent coupon and matures after 10 years. If current interest rates are 10 percent, what should be the price of the bond? Price = $1,000 x 0.3855 + $1,000 x 7.5% x 6.1446 Price = $385.50 + $460.85 Price = $846.35 b.
Dividing the present value of future cash flows by the cost of the investment indicates that every dollar invested buys securities worth $1.18. Value is created. Table 1 The appropriate intrinsic value of PacifiCorp Assume: 1. 10-year investment horizon, when you liquidate at “book” or accumulated investment value 2. initial investment is $9.4 billion 3. no dividends are paid, all cash flows are reinvested 4. return on equity = 7.45% 5. cost of equity = 5.72% Year 0 1 2 3 4 5 6 7 8 9 10 Investment or Book Equity Value 9.4 10.1 10.9 11.7 12.5 13.5 14.5 15.5 16.7 17.9 19.3 Market Value (or Intrinsic Value) = Present value @ 5.72% of 19.3 = $11.07 Market/Book = $11.07/9.4 = $1.18 Value created: $1.00 invested becomes $1.18 in market value. Discounted Cash Flow Appendix 1 shows the discounted cash flow for following 15 years.
• globalization • arbitrage. • international trading. 5. Which of the following is true about bonds? • They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year.
Rank the alternatives from most valuable to least valuable if the interest rate is 10% per year. Amount/Years/pv Option 1 =100/1/90.9090909 Option 2 =200/5/124.184265 Option 3 =300/10/115.662987 Ranking-option 2, option 3, and then option 1 b. What is your ranking if the interest rate is only 5% per year? Amount/years/pv Option 1 =100/1/95.2380952 Option 2 =200/5/156.705233 Option 3 =300/10/184.173976 Ranking-option 3, option 2, and then option 1 c. What is your ranking if the interest rate is 20% per year? Amount/years/pv Option 1
Text Problem Sets and Concept and Principles Summary FIN 571 Text Problem Sets and Concept and Principles Summary Problem A3: (Bond valuation) General Electric made a coupon payment yesterday on its 6.75% bonds that mature in 8.5 years. If the required return on these bonds is 8% APR, what should be the market price of these bonds? PMT -33.75 FV -1000 N 17 Rate 4% Market Price $923.96 Fair Value of a bond = C/r*(1-1/(1+r)^n)+M/(1+r)^n Assuming that it’s a semi-annual bond with face value of $1000 A13. (Required return for a preferred stock) Sony $4.50 preferred is selling for $65.50. The preferred dividend is non-growing.
What are the earnings after interest? Earnings after interest = (EBIT - Interest on debt) Interest = $0 EBIT = $3,000 = $3,000 – ($5,000 x 0.10) = $3,000 - $500 = $2,500 (Earnings after interest) Firm A Firm B $2,500 $2,500 c. If sales increase by 10 percent to 11,000 units, by what percentage will each firm’s earnings after interest increase? To answer the question, determine the earnings after taxes and compute the percentage increase in these earnings from the answers you derived in part b. EBIT = (Sales Revenue - Variable Cost - Fixed Cost) = 10,000 x (1.1 x $2.50) = $27,500 = 10,000 x (1.1 x $1) = $11,000 = $12,000 EBIT = $4,500 ($27,500 - $11,000 - $12,000) Earnings after interest = (EBIT - Interest on debt) Interest = $0 EBIT = $4,500 = $4,500 – ($5000 x 0.10) = $4,500 - $500 (Less interest) = $4,000 (Earnings after interest) = $4,500 - $3000 / (3000 x 100%) Firm A Firm B = (4000 - 2500) x (2500 x 100%) 50% increase = 60% (Earnings after interest % increase percentage) d. Why are the percentage changes different? The percentage increased in earnings based on the higher taxes Firm B acquired from its financed debt. What happened is the firm’s profits were reduced by
BE10-1 Kananga Company has these obligations at December 31: (a) a note payable for $100,000 due in 2 years – Yes, this is a long term liability. (b) a 10-year mortgage payable of $200,000 payable in ten $20,000 annual payments – No, this would be considered a liquidity. (c) interest payable of $15,000 on the mortgage – No, this would be a current
Seth Taylor ACSI 4200 October 20, 2013 Excel Modeling Problems – Chapter 6 An annual bond has a face value of $1,000, makes an annual coupon payment of $12 per year, has a discount rate per year of 4.3%, and has 8 years to maturity. What is the price of this bond? Using Excel’s PV function… =-PV(discount rate, years to maturity, annual coupon payment, face value) =-PV(4.3%, 8, $12, $1,000) = $793.85 A semi-annual bond has a face value of $1,000, an annual coupon rate of 4.60%, a yield to maturity of 8.1%, makes 2 (semi-annual) coupon payments per year, and 10 periods to maturity (or 5 years to maturity). Determine the price of this bond based on the Annual Percentage Rate (APR) convention and the price of this bond based on the Effective Annual Rate (EAR) convention. APR (annual percentage rate) convention: $688.71 EAR (effective annual rate) convention: $688.39 Determine the relationship between bond price and yield to maturity by constructing a graph of the relationship.
For a preferred stock with the dividend amount of $2.00 each quarter, what is the PV of it with an annual discount rate of 8%? If the price of the preferred stock is $80, what is the yield (ROI, APR) of this security? a. $60, 8% b. $80, 8% c. $60, 10% d. $80, 10% e. $100, 10% Answer: e V0 = D/k = 8/0.08 = $100.