If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell? =Preference Dividend/ Required Return= $7.5/ 6.5%= $ 115.38 13. The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?
A company issued a 30-year, $1,000 par value bond that has 10.85% coupon rate. Coupons are paid out semi-annually and the relevant interest rate is 9% compounded semiannually. a. (3 points) What was the value of this bond when it was issued? PMT = (.1085/2)*1000=54.25 N = 60 R = 0.09/2=0.045 (or 4.5 for calculator purposes) FV = 1000 PV =?
Given the following cash flow stream at the end of each year: Year 1: $4,000 Year 2: $2,000 Year 3: 0 Year 4: -$1,000 Using a 10% discount rate, the present value of this cash flow stream is: a. $4,606 b. $3,415 c. $3,636 d. Other 8. Consider a 10-year annuity that promises to pay out $10,000 per year, given this is an ordinary annuity and that an investor can earn 10% on her money, the future value of this annuity, at the end of 10 years, would be: a. $175,312 b.
Bond computations: Straight-line amortization Southlake Corporation issued $900,000 of 8% bonds on March 1, 20X1. The bonds pay interest on March 1 and September 1 and mature in 10 years. Assume the independent cases that follow. • Case A—The bonds are issued at 100. • Case B—The bonds are issued at 96.
(c/2) (d0.5 + d1) + d1 = 1 ⇒ c = 2(1-d1)/(d0.5+d1) = 5.8233% e) What is the 0.5-year zero rate? r0.5 = 2(d0.5-1-1) = 5.9406% f) What is the 1-year zero rate? r1 = 2(d1-1/2-1) = 5.8216% g) Considering the shape of the yield curve, should the yield on the 1-year 10%coupon bond be higher or lower than the 1-year par rate? Higher. Both the 10%-coupon bond and the par bond have yields that are some average of the two zero rates.
The difference between coupon rate and required return are equal only if the bond sells for exactly par. Questions and problems Problem # 3 Bond prices: Zevon Inc., has 7 percent coupon bonds on the market that have 8 percent left to maturity. The bonds make annual payments. If the YTM on these bonds is 9 percent, what is the current bond price? Bond value= C*[1-1(1+r)^t]/r + F/(1+r)^t = 70*[1-1(1+0.09)^8]/0.09 + 1000/(1+0.09)^8 = 889.30 Problem # 13 Using Treasury quotes: locate the treasury issue in figure 6.3 maturing in June 2023.
ALTERNATIVE PROBLEMS AND SOLUTIONS ALTERNATIVE PROBLEMS 11- 1A. (Individual or Component Costs of Capital) Compute the cost for the following sources of Financing: a. A bond that has a $1,000 par value (face value) and a contract or coupon interior rate of 12%. A new issue would have a flotation cost of 6% of the $1,125 market value. The bonds mature in 10 years.
The annual growth rate is I in the following equation: $1(1 + I)10 = $2. We can find I in the equation above as follows: Using a financial calculator input N = 10, PV = -1, PMT = 0, FV = 2, and I/YR = ? Solving for I/YR you obtain 7.18%. Viewed another way, if earnings had grown at the rate of 10% per year for 10 years, then EPS would have increased from $1.00 to $2.59, found as follows: Using a financial calculator, input N = 10, I/YR = 10, PV = -1, PMT = 0, and FV = ?. Solving for FV you obtain $2.59.
With this new development, if we assume that the previous 4,796,000 shares of common stock that were originally issued in March of 1993 are now also worth $1 per share, this gives a total of $4,796,000. The total valuation of the company will then be $800,000 + $4,796,000 = $5,596,000. This is the value that we believe to represent the valuation of Neverfail as of November 1994. After round 1 of VC investment: Due to the deal with the Pacific Ridge, Neverfail share prices were going for $1.50 per share The Company was valued at $9 million as of December 1994 according to the case study. Initial value of Pacific ridge investment (December 1995) is: 666,667 * $1.50 + 133,333 * $0.3 = $1,040,000.4 (initial investment, exhibit 7).
Week 3 Pg 210-211 5-1 Bond Valuation with Summary Payments (N = 12; I/YR = YTM = 9%; PMT = 0.08 × 1,000 = 80, FV = 1000) PV = 928.39 5-2 Yield to Maturity for Annual Payments (N = 12; PV = -850; PMT = 0.10 × 1,000 = 100; FV = 1000) YTM = 12.48% 5-6 Maturity Risk Premium r* = 3%; IP = 3%; rT-2 = 6.3%; rT-2 = r* + IP + MRP = 6.3% rT-2 = 3% + 3% + MRP = 6.3% MRP = 0.3% 5-7 Bond Valuation with Semi Annual Payments (N = 16; I/YR = 8.5/2 = 4.25; PMT = 50; FV = 1000) PV=1,085.80 5-13 Yield to Maturity and Current Yield N = 5, PMT = 80, and FV = 1000 Current yield = Ann interest/Current price 0.0821 = $80/PV PV = $80/0.0821 = $974.42 (N = 5, PV = -974.42, PMT = 80, and FV = 1000) = 8.65% 6-6 Double Beta pg 257 If a company’s beta were to double, would its expected return double? If a company’s beta were to double the expected return wouldn’t because an increase in beta would increase a company’s expected return only by the amount equal to the market risk premium multiplied by the change in the beta amount. Pg 258-259 6-1 Portfolio Beta An individual has $35,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a beta of 1.4. If these are the only two investments in her portfolio, what is her portfolio’s beta? $35,000 0.8 1st Investment, 40,000 1.4 2nd Investment Total $75,000 ($35,000/$75,000)(0.8) + ($40,000/$75,000)(1.4) = 1.12 6-2 Required Rate of Return Assume that the risk-free rate is 6% and that the expected return on the market is 13%.