Anda di halaman 1dari 3

Chapter 6 Valuing Shares and Bonds

Questions from the required textbook at the end of Chapter 6


2. Issued bonds have a price of $91.77 and a coupon rate of 10% paid annually.
The bonds will mature in 6 years. What is the yield to maturity?
3. You have just purchased a newly issued $100 5-year bond at par. This bond
(bond A) pays $4 in interest semi-annually ($8 per year).

You are also

negotiating the purchase of a $100 6-year bond that pays $5 semi-annually and
has 5 years to maturity (bond B).
a. What is rate required in the market (the yield) on the bonds assuming
that they have the same risk?
b. What should you be willing to pay (at most) for bond B?
c. How will your answer to part (b) change is bond A pays $3 (instead of$4)
in semi-annual interest but still sells for $100?
9. Playground Corporation has 2 bonds outstanding, both of which have a 9%
coupon rate (with annual coupons) and sell for their $100 par value. The first
bond, bond A, has 4 years to maturity. The second bond, bond B, has 8 years to
maturity. If the market interest rates were to rise by 2%, which bond would
have the larger price change? Calculate the new prices to illustrate your answer.
10. SALT Ltd shares currently sell for $3 per share. The last dividend was $0.20 per
share. The dividend is expected to grow at 5%. (a) What is the required return
on SALT shares? (b) The dividend yield?

14. Downhill Company has an outstanding debt issue that is currently selling for
$90.06.

The yield to maturity is 10%, and the bonds mature in 8 years.

Assuming that the face value of $100 with annual coupons, what is the coupon
rate?
15. Vulture Ltd is contemplating selling some 10-year bonds to raise funds for a
planned expansion.

Vulture currently has an issue outstanding with an $8

annual coupon, paid semi-annually. These bonds currently sell for $93.49, a
discount relative to their $100 face value, and they have 10 years remaining to
maturity. What coupon rate must the new issue have if it is to sell at par when it
is issued?
16. Old Equipment anticipates a dividend growth rate of 4% forever. The marketrequired return is 20% on similar securities. The next dividend is predicted to be
$0.152 per share. What is the current price per share?
17. Suppose that a shareholder has just paid $4 per share for Go Go Company
shares. The shares will pay a $0.20 per share dividend in the upcoming year, and
this dividend is expected to grow at an annual rate of 8% indefinitely. The
shareholder felt that the price paid was an appropriate price, given an assessment
of Go Gos risks. What is annual required rate of return of this shareholder?
18. The Zero Company does not currently pay dividends. You predict that dividend
payments will begin in 4 years and that the first cash dividend will be $0.50. the
dividend will grow at 8% thereafter. If the required return is 33%, what is the
value of a share?
24. Green Ltd has just paid a $0.40 dividend. The dividend is expected to grow at
12% for the next 4 years. After that, the grow rate will be 4% indefinitely. If the
required return is 16%, what is the current value of a share today?
25. Save Ltd is expanding rapidly. Its dividend growth rate for the coming year is
projected at 25%. This rate will decline by 5% points per year until it reaches
the industry average of 5%. Once it reaches 5%, it will stay there indefinitely.
The most recent dividend was $0.20 per share, and the market requires a return
of 16% on investment such as this one. What is the price per share for Save?
2

27. What is the value of an asset that pays $4 per year forever? Assume a 20%
required return. How would your answer change if the cash flow grows at a rate
of 5% per year forever? Assume that $4 was the most recent payment.
Additional practice questions:
1. Heavy Metal Corporation is expected to generate the following free cash flows
over the next five years:
Year

FCF($ million)

53

68

78

75

82

After then, the free cash flows are expected to grow at the industry average of
4% per year. Using the discounted free cash flow model and a weighted average
cost of capital of 14%:
a. Estimate the enterprise value of Heavy Metal.
b. If Heavy Metal has no excess cash, debt of $300 million, and 40 million shares
outstanding, estimate its share price.
2. Covan, Inc., is expected to have the following free cash flows:
Year

FCF($ million)

10

12

13

14

Grow by 4% per year

a. Covan has 8 million shares outstanding, $3 million in excess cash, and it has
no debt. If its cost of capital is 12%, what should its stock price be?
b. Covan reinvests all its FCF and has no plains to add debt or change its cash
holdings. If you plan to sell Covan at the beginning of year 2, what should
you expect its price to be?
c. Assume you bought Covan stock at the beginning of year 1. What is your
return expected to be from holding Covan stock until year 2?

Anda mungkin juga menyukai