BBA 3310 Unit VI Assignment

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Question 1: (10 points). (Bond valuation) Calculate the value of a bond that matures in 12 years and has

$1,000 par value. The annual coupon interest rate is 9 percent and the market’s required yield to maturity

on a comparable-risk bond is 12 percent. Round to the nearest cent.

The value of the bond is

Question 2: (10 points). (Bond valuation) Enterprise, Inc. bonds have an annual coupon rate of 11

percent. The interest is paid semiannually and the bonds mature in 9 years. Their par value is $1,000. If

the market’s required yield to maturity on a comparable-risk bond is 14 percent, what is the value of the

bond? What is its value if the interest is paid annually and semiannually? (Round to the nearest cent.)

a. The value of the Enterprise bonds if the interest is paid semiannually is

b. The value of the Enterprise bonds if the interest is paid annually is

$

$

Question 3: (10 points). (Yield to maturity) The market price is $750 for a 20-year bond ($1,000 par

value) that pays 9 percent annual interest, but makes interest payments on a semiannual basis (4.5

percent semiannually). What is the bond’s yield to maturity? (Round to two decimal places.)

The bond’s yield to maturity is

%

Question 4: (10 points). (Yield to maturity) A bond’s market price is $950. It has a $1,000 par value, will

mature in 14 years, and has a coupon interest rate of 8 percent annual interest, but makes its interest

payments semiannually. What is the bond’s yield to maturity? What happens to the bond’s yield to

maturity if the bond matures in 28 years? What if it matures in 7 years? (Round to two decimal places.)

The bond’s yield to maturity if it matures in 14 years is

The bond’s yield to maturity if it matures in 28 years is

The bond’s yield to maturity if it matures in 7 years is

%

%

%

Question 5: (15 points). (Bond valuation relationships) Arizona Public Utilities issued a bond that pays

$70 in interest, with a $1,000 par value and matures in 25 years. The markers required yield to maturity

on a comparable-risk bond is 8 percent. (Round to the nearest cent.) For questions with two answer

options (e.g. increase/decrease) choose the best answer and write it in the answer block.

Question

a. What is the value of the bond if the markers required yield to maturity on a comparable-risk

bond is 8 percent?

b. What is the value of the bond if the markers required yield to maturity on a comparable-risk

bond increases to 11 percent?

Answer

$

$

c. What is the value of the bond if the market’s required yield to maturity on a comparable-risk

bond decreases to 7 percent?

$

d. The change in the value of a bond caused by changing interest rates is called interest-rate

risk. Based on the answer: in parts b and c, a decrease in interest rates (the yield to maturity)

will cause the value of a bond to (increase/decrease):

By contrast in interest rates will cause the value to (increase/decrease):

BBA 3310 Unit VI Assignment

Also, based on the answers in part b, if the yield to maturity (current interest rate) equals the

coupon interest rate, the bond will sell at (par/face value):

exceeds the bond’s coupon rate, the bond will sell at a (discount/premium):

and is less than the bond’s coupon rate, the bond will sell at a (discount/premium):

e. Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the

yield to maturity on a comparable-risk bond is 8 percent? $ 960.07 Assume the bond matures in

5 years instead of 25 years, what is the value of the bond if the yield to maturity on a

comparable-risk bond is 11 percent?

$

f. Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the

yield to maturity on a comparable-risk bond is 7 percent?

$

g. From the findings in part e, we can conclude that a bondholder owning a long-term bond is

exposed to (more/less) interest-rate risk than one owning a short-term bond.

Question 6: (5 points). (Measuring growth) If Pepperdine, Inc.’s return on equity is 14 percent and the

management plans to retain 55 percent of earnings for investment purposes, what will be the firm’s

growth rate? (Round to two decimal places.)

The firm’s growth rate will be

7.70

%

Question 7: (10 points). (Common stock valuation) The common stock of NCP paid $1.29 in dividends

last year. Dividends are expected to grow at an annual rate of 6.00 percent for an indefinite number of

years. (Round to the nearest cent.)

a. If your required rate of return is 8.70 percent, the value of the stock for you is:

b. You (should/should not) make the investment if your expected value of the

stock is (greater/less) than the current market price because the stock would be

undervalued.

$

Question 8: (10 points). (Measuring growth) Given that a firm’s return on equity is 22 percent and

management plans to retain 37 percent of earnings for investment purposes, what will be the firm’s

growth rate? If the firm decides to increase its retention rate, what will happen to the value of its common

stock? (Round to two decimal places.)

a. The firm’s growth rate will be:

b. If the firm decides to increase its retention ratio, what will happen to the value

of its common stock? An increase in the retention rate will (increase/decrease) the

rate of growth in dividends, which in turn will (increase/decrease) the value of the

common stock.

8.14%

Question 9: (10 points). (Relative valuation of common stock) Using the P/E ratio approach to valuation,

calculate the value of a share of stock under the following conditions:

the investor’s required rate of return is 13 percent,

the expected level of earnings at the end of this year (E1) is $8,

the firm follows a policy of retaining 40 percent of its earnings,

the return on equity (ROE) is 15 percent, and

similar shares of stock sell at multiples of 8.571 times earnings per share.

Now show that you get the same answer using the discounted dividend model. (Round to the nearest

cent.)

BBA 3310 Unit VI Assignment

a. The stock price using the P/E ratio valuation method is:

b. The stock price using the dividend discount model is:

$

$

Question 10: (10 points) (Preferred stock valuation) Calculate the value of a preferred stock that pays a

dividend of $8.00 per share when the market’s required yield on similar shares is 13 percent. (Round to

the nearest cent.)

a. The value of the preferred stock is

$

Per share

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