Valuation of Securities

1. Calculate the price of a $1,000 face value bond if the coupon rate is 12%, payable semiannually
the time until maturity is 15 years, and the going interest rate is 10%.

a. $1,153.75

b. $1,225.50

c. $1,311.65

d. $1,550.35

2. Calculate the market price of a $1,000 face value bond if the coupon rate is 7%, the time until
maturity is 5 years, and the current market rate is 12%. Assume semiannual payments.

a. $850

b. $715

c. $805

d. $816

3. Calculate the price of a $1,000 face value bond if the coupon rate is 14% payable semiannually,
the time until maturity is 30 years, and the going market rate is 9%.

a. $1,515.96

b. $1,531.82

c. $1,549.96

d. $1,495.72

4. Longly Trucking is issuing a 20-year bond with a $2,000 face value tomorrow. The issue is to pay
an 8% coupon rate payable semiannually, because that was the interest rate while it was being
planned. However interest rates have increased suddenly and are expected to be 9% when the bond
is actually sold. What will Longly receive for each bond tomorrow?

a. $1,614.33

b. $1,815.93

c. $1,673.19

d. $1,801.13

5. Determine the value of a $1,000 Canadian Pacific Limited perpetual 4% debenture (bond) at the
4% required rate of return.

a. $1,000

b. $1,004

c. $1,400

d. $1,040

$21.00 cumulative preferred stock to an investor who requires a 9% annual rate of return. However. $55 10. series B. $17. Determine the value of a share of Litton Industries Series B $2.50 c. a.000 Canadian Pacific Limited perpetual 4% annual coupon rate debenture (bond) at the 6% annual required rate of return.67 d. $50 d. Determine the value of a $1. what was the bond's market price on January 15. 1975? a. At the time of purchase. a.6.00 cumulative preferred stock to an investor who requires a 12% annual rate of return.87 d. $16.400 b. 1975. the issue is not expected to be called at any time in the foreseeable future. $598. $967. Determine the value of a share of Baltimore Gas and Electric 4. $49 c.67 9. $860 7. $666. $19. $16.27 b.22 c.67 c. $45 b. $575. $20.000 par value bond with an annual coupon of $50 on January 15. Assume that an investor purchased a $1.80 d. par value $100 to an investor who requires a 9% annual rate of return on this security. $588. $608. a. The issue is callable at $110 per share plus accrued dividends.5% cumulative preferred stock.20 b.30 .72 d. If the YTM remained constant until maturity. $1. a. the bond's YTM was 9% and its term-to-maturity was 30 years.97 c. Determine the value of a share of Litton Industries Series B $2.70 b. $22. $17.09 8.

2% d. $643. 4.9% 14. $912. $950 b.000 par value bond with an annual coupon of $50 on January 15. Assume that an investor purchased a $1.000 and a term-to-maturity of 10 years.25 $3. 4. 11.000 13.45 d. At the time of purchase. Assume that an investor purchased a $1. $1. is expected to pay the following dividends: Year-end 1 2 3 4 Dividends $2. $25.25 12.0% c. The stock of Sedly Inc. $629.7% b. 1985? a. $990 d.90 c. If they have a par value of $1. 3. What should Sedly sell for today if the annual return on stocks of similar risk is 12%? a.90 c. Baker-Midland Corporation's bonds are selling for $511. If the YTM remains constant until maturity. $1. what will be the bond's market price on January 15.75 $2. what is the annual coupon rate of Baker's bonds? a. 3.00 At the end of the fourth year its stock value is expected to be $37.10 b. $27.85 d. what was the bond's market price on January 15.65 with a YTM of 13%.050 c.000 par value bond with an annual coupon of $50 on January 15. $634. the bond's YTM was 9% and its term-to-maturity was 30 years. 2005? a.15 . If the YTM remained constant until maturity. 1975.15 b. At the time of purchase. 1975. $30.50 $1. the bond's YTM was 9% and its term-to-maturity was 30 years.50. $31.

$72. $64. $65. What is Pancake's intrinsic value? a.23 c. as of year 0) pays an annual dividend of $5 per share.64 d. Fred Tibbits has made a detailed study of the denim clothing industry. $71. The Pancake Corporation recently paid a $3 dividend.50 b. He thinks the price will be about $75 when he sells. $59. What is this preferred stock selling for today? a. Investors generally require an expected return of at least 9% annually before they'll buy stocks similar to Pancake. $77.13 d.75 17. $56. He's particularly interested in a company called Denhart Fashions that makes stylish denim apparel for children and teenagers. The firm currently (that is. $79.44 c.00 for the next two years followed the next year with a dividend of $6. The risk-appropriate annual interest rate for the issue is currently 11%.05 d. Fred's investment plan is to buy Denhart now.50.50 b.20 16. $64. Fred has done a forecast of Denhart's earnings and looked at its dividend payment record.25 c.45 c. He's come to the conclusion that the firm will pay a dividend of $5. and it is expected to grow at 5% forever.24 18. Determine the current value to investors of a share of Foreman common stock at a 14% annually required rate of return.85 d. $66. The Foreman Company's earnings and common stock dividends have been growing at an annual rate of 6% over the past 10 years and are expected to continue growing at this rate for the foreseeable future. $75. hold it for three years and then sell. $61. a. $63.15. What is the most Fred should be willing to pay for a share of Denhart today if he can earn 10% annually on investments of similar risk? a.92 b. $65. Blackstone Corporation's $7 preferred was issued five years ago.85 . $69. $78.34 b.

6% b.9% . as of year 0) pays an annual dividend of $5 per share. $59.114. The firm currently (that is. $58. 14% c.493.34. What is the value of one share of Allied preferred stock if the annual required rate of return is 12%. Allied Milling's preferred stock pays $7. 12.50 b.00 c.19. $14.376 22. $20. What was the underwriting spread from this stock offering? a. Determine the current value to investors of a share of Foreman common stock at a 6% annual required rate of return. 13.00 per year.668 d. if JRM's current per-share dividend is $2 and is expected to remain at $2 for the foreseeable future? a. and what is the yield on Allied Preferred if the market price is $50. undefined 20.50 21. $12. $13. $11. $12. $16.00 per share? a.23. $57.250. $64. The company received net proceeds from its underwriters of $287. 14% d. $12. $55.886 c. a.21. $65.50 d. $65.85 d.506. What is the current per-share value of JRM Corporation to an investor who requires a 16% annual rate of return.583. Canadian National Railway sold 10 million shares of stock to the public at $30 per share.85 c. The Foreman Company's earnings and common stock dividends have been growing at an annual rate of 6% over the past 10 years and are expected to continue growing at this rate for the foreseeable future.33.115 b.453.50 b.

The dividend is expected to grow at 8% per year indefinitely. The firm just paid a $3.000 b.500. a. 7.000 d. The market's annual required rate of return is 14%.700.000. 7. 2.500.37 b.700. 2. What is Hall's current annual price- earnings (P/E) ratio? a.000 shares. $240.400. $205. Hall Management Corporation has a 40% dividend payout ratio.000 c. $207.00 24.23.000 shares. If the firm estimated that the market's annual required rate of return would be 7% at the time of issuance.000. Assume that the issue price of the preferred stock reflected an annual market required rate of return of 6.000. $203. 6.000 shares.000 shares.00 dividend. 1.75%.50 dividend on its shares of common stock. how many shares should Mid-South plan to offer for sale? b. what were the actual proceeds of the stock issue? a.20 . 5. Mid-South Power is planning to raise $200 million for a new power plant. Based on your answer to part (a). Its investment bank recommends that the firm issue preferred stock with a $7. 2.07 d.87 c.

$1.Valuation of Securities Section 1 . $1.000 [PVIF 5%.153.75 b. payable semiannually the time until maturity is 15 years.311. $715 c.n] + FV [PVIF i.000 face value bond if the coupon rate is 7% payable semiannually.75 KEYSTROKES: HP TI 1.n] + FV [PVIF i.50 c. and the going interest rate is 12%. a. $1. $850 b.000 face value bond if the coupon rate is 12%.THE PROBLEM BANK . $805 d.153.72 Solution: -1.10] = $35 (7.550.10] + $1.3725) + $1.35 ANSWER: a SOLUTION: VB = PMT [PVIFAi.000 (.SOLUTIONS Part 2 .30] = $60 (15.Basic 1.000 [PVIF 6%.00 .000 (. $816 ANSWER: d SOLUTION: VB = PMT [PVIFAi. $1.153.2314) = $1. Calculate the price of a $1.72 2.n] VB = $35 [PVIFA6.65 d.153. Calculate the price of a $1.3601) + $1.000 [FV] 30 [N] 30 [N] 5 [I/YR] 5 [I/Y] [PV] [PV] 60 [PMT] 60 [PMT] [PV] [CPT] [PV] Solution: -1.000 [FV] 1.n] VB = $60 [PVIFA5%.225.30] + $1.5584) = $816. and the going interest rate is 10%. a. the time until maturity is 5 years.

673.000 b.40] = $80 (18.515.n] + FV [PVIF i.82 c. $1. a.3.5%.40] + $2.5%. $1. because that was the interest rate while it was being planned.531. $1. $1. Longly Trucking is issuing a 20-year bond with a $2.000 face value tomorrow.96 b. $1.000 Canadian Pacific Limited perpetual 4% debenture (bond) at the 4% required rate of return.000 (.801.004 c.549.000 [PVIF 4.400 d.04 = $40 kd = 0.n] + FV [PVIF i.000 [PVIF 4.815.33 b.515. However interest rates have increased suddenly and are expected to be 9% when the bond is actually sold.96 4.93 5.495.5%.000 x . Determine the value of a $1.4016) + $2. $1.60] = $70 (20.04 VB-perpetual = $40 / 0. $1.72 ANSWER: a SOLUTION: VB = PMT [PVIFAi.614.0713) = $1.1719) = $1.13 ANSWER: b SOLUTION: VB = PMT [PVIFAi.93 c.04 = $1.040 ANSWER: a SOLUTION: VB-perpetual = I/kd I = $1. $1.19 d.638) + $1. and the going market rate is 9%.n] VB = $80 [PVIFA4.n] VB = $70 [PVIFA4. $1. $1.60] + $1.815. Calculate the price of a $1. the time until maturity is 30 years.96 d. a.000 (. $1.5%. What will Longly receive for each bond tomorrow? a.000 face value bond if the coupon rate is 14% payable semiannually.000 . The issue is to pay an 8% coupon rate payable semiannually. $1.

$20.09 ANSWER: b SOLUTION: Vp = Dp/kp Dp = $2 kp = 0.22 8.20 b. Determine the value of a share of Litton Industries Series B $2. $19.00 cumulative preferred stock to an investor who requires a 9% annual rate of return. $16.00 cumulative preferred stock to an investor who requires a 12% annual rate of return. a. $860 ANSWER: c SOLUTION: VB-perpetual = I/kd I = 0.67 7.97 c.06 VB-perpetual = $40 / 0.400 b.22 c. a.72 d.6. $967.000 kd = 0. Determine the value of a $1.09 = $22. $666.87 d.67 ANSWER: d SOLUTION: .22 KEYSTROKES: HP TI 2[ ] 2[ ] . Determine the value of a share of Litton Industries Series B $2.04 x $1.27 b.06 = $666.09 [=] . a.22 Solution: 22. $17.000 Canadian Pacific Limited perpetual 4% annual coupon rate debenture (bond) at the 6% annual required rate of return.09 [=] Solution: 22.67 c.09 Vp = $2 / 0. $17. $1. $21. $22.67 d. $16.

50 c.30) + ($1000) (PVIF 9%. $598. 1985? a.80 d.09 Vp = $4.075) = $588. $643. The issue is callable at $110 per share plus accrued dividends. $49 c. $575.90 c.000) (0.09 = $50 10. $629.70 11.30) = ($50) (10. the issue is not expected to be called at any time in the foreseeable future. At the time of purchase. 1975.045 x $100 = $4. If the YTM remained constant until maturity.000 par value bond with an annual coupon of $50 on January 15.12 = $16. At the time of purchase. 1975? a. par value $100 to an investor who requires a 9% annual rate of return on this security. However. what was the bond's market price on January 15.274) + ($1.000 par value bond with an annual coupon of $50 on January 15. Assume that an investor purchased a $1. $55 ANSWER: c SOLUTION: Vp = Dp/kp Dp = 0. $45 b. kp = 0. $634. 1975.Vp = Dp/kp Dp = $2 kp = 0.70 b.67 9. $588.30 ANSWER: a SOLUTION: VB = Value of bond VB = ($50) (PVIFA9%. $912.5% cumulative preferred stock.12 Vp = $2 / 0. If the YTM remained constant until maturity.50. Determine the value of a share of Baltimore Gas and Electric 4. series B.25 ANSWER: c . a.15 b. $50 d. $608. Assume that an investor purchased a $1. the bond's YTM was 9% and its term-to-maturity was 30 years.50 / 0. what was the bond's market price on January 15.45 d. the bond's YTM was 9% and its term-to-maturity was 30 years.

000) (PVIF 13%. 4.000) = $1.65 [ -/+] [PV] 511.65 . 4. 3.000 ANSWER: d SOLUTION: VB = ($50) (PVIFA9%. Baker-Midland Corporation's bonds are selling for $511.20) = ($50) (9. 3. $990 d.n) $511.426) = ($1.000 and a term-to-maturity of 10 years. what will be the bond's market price on January 15.0) = ($50) (0) + ($1000) (1.000) (0. If the YTM remains constant until maturity. what is the annual coupon rate of Baker's bonds? a.00 [ ] 1000 [=] [ ] 1000 [=] Solution: 4% Solution: 4% .426 = $40 Coupon = $40 / $1. 2005? a.65 with a YTM of 13%.0) + ($1000) (PVIF 9%.n) + (Par) (PVIF i.10) $511. the bond's YTM was 9% and its term-to-maturity was 30 years.10) + ($1. $1.2% d.00) / 5. $1.7% b.295) Interest = ($511.65 = (Interest) (PVIFA13%.00 Partial solution: 40.65 = (Interest) (5. 1975.45 12. If they have a par value of $1.000 13.129) + ($1000) (0.SOLUTION: VB = ($50) (PVIFA9%.00% KEYSTROKES: HP TI 511. At the time of purchase.050 c.65 [ -/+] [PV] 1000 [FV] 1000 [FV] 10 [N] 10 [N] 13 [I/YR] 13 [I/Y] [PMT] [CPT] [PMT] Partial solution: 40.295.0% c. Assume that an investor purchased a $1.000 = 4.20) + ($1000) (PVIF 9%.000 par value bond with an annual coupon of $50 on January 15. $950 b.9% ANSWER: b SOLUTION: VB = (Interest) (PVIFAi.178) = $634.

$25.14.10 b.75 $2. $30.10 $31.n PV $2.15 15.50 $1.75 . $31.56 $5.79 $1.20 ANSWER: a SOLUTION: Cash Flow PVIF 14%. $61.50.25 $39. Fred Tibbits has made a detailed study of the denim clothing industry.25 $3.23 c.7513 $61. He thinks the price will be about $75 when he sells.7972 $2.6355 $25.00 .92 b. Fred has done a forecast of Denhart's earnings and looked at its dividend payment record.85 d.8929 $2.8264 $4. hold it for three years and then sell.01 $3. $27.23 $69.25 . What should Sedly sell for today if the annual return on stocks of similar risk is 12%? a. He's particularly interested in a company called Denhart Fashions that makes stylish denim apparel for children and teenagers.00 .00 At the end of the fourth year its stock value is expected to be $37.90 c. $71. What is the most Fred should be willing to pay for a share of Denhart today if he can earn 10% annually on investments of similar risk? a.15 ANSWER: d SOLUTION: Cash Flow PVIF 12.n PV $5.50.92 . He's come to the c onclusion that the firm will pay a dividend of $5.13 d. $69.9091 $4.50 .50 .50 . The stock of Sedly Inc. is expected to pay the following dividends: Year-end 1 2 3 4 Dividends $2.7118 $1.13 $81.00 for the next two years followed the next year with a dividend of $6. Fred's investment plan is to buy Denhart now. $64.

$59. The Foreman Company's earnings and common stock dividends have been growing at an annual rate of 6% over the past 10 years and are expected to continue growing at this rate for the foreseeable future.05 d.11 [=] .34 b. $64.85 ANSWER: b . Investors generally require an expected return of at least 9% annually before they'll buy stocks similar to Pancake. $65. a.44 c. $75.64 18. as of year 0) pays an annual dividend of $5 per share. and it is expected to grow at 5% forever.85 d.25 c.11 [=] Solution: 63. The risk-appropriate annual interest rate for the issue is currently 11%. $56. $77. $65.64 d.45 c.24 ANSWER: c SOLUTION: KEYSTROKES: HP TI 7[ ] 7[ ] . Blackstone Corporation's $7 preferred was issued five years ago. $79.75 ANSWER: d SOLUTION: 17. What is Pancake's intrinsic value? a.50 b. $66. $63.16. $72.50 b.64 Solution: 63. $78. What is this preferred stock selling for today? a. Determine the current value to investors of a share of Foreman common stock at a 14% annually required rate of return. The Pancake Corporation recently paid a $3 dividend. The firm currently (that is.

SOLUTION: P0 = D1/(ks -g) g = 0.506. $11.14 .06. What is the current per-share value of JRM Corporation to an investor who requires a 16% annual rate of return.50 ANSWER: a SOLUTION: P0 = D/ks = $2. undefined ANSWER: d SOLUTION: P0 = D1/(ke -g) g = . $16. Determine the current value to investors of a share of Foreman common stock at a 6% annual required rate of return.06) = $66.583.0. The company received net proceeds from its underwriters of $287.50 d.668 d.06 . 20.00 c. D01 = $5. The Foreman Company's earnings and common stock dividends have been growing at an annual rate of 6% over the past 10 years and are expected to continue growing at this rate for the foreseeable future. What was the underwriting spread from this stock offering? a. $20. $12.. $65.85 c.06 D1 = $5.453.14 P0 = $5.06) / (0.30 ke = . which violates assumption of constant-growth model.250. The firm currently (that is. $13.114.50 b. $12.30/(. if JRM's current per-share dividend is $2 and is expected to remain at $2 for the foreseeable future? a. ks = 0.06 P0 = 5.376 ANSWER: b .886 c. as of year 0) pays an annual dividend of $5 per share.06) = Undefined ke = g.115 b.00.493. a.00 (1. $65.00/0.16 =$12. $14.25 19.50 b. $64.85 d. Canadian National Railway sold 10 million shares of stock to the public at $30 per share. $12.50 21.

000.6% b.00/0.500. 14% c. $57. $205.114 = $12. 2.12 = $58. Its investment bank recommends that the firm issue preferred stock with a $7.000. $55.000. What is Hall's current annual price- earnings (P/E) ratio? a.$287. 2.37 .700.000 shares. The firm just paid a $3. If the firm estimated that the market's annual required rate of return would be 7% at the time of issuance. Vp = Dp/kp = $7.00/0.34.00 ANSWER: b SOLUTION: a. $203. 13. 14% d.000. $207. What is the value of one share of Allied preferred stock if the annual required rate of return is 12%.000.000. what were the actual proceeds of the stock issue? a.000 shares.75%.SOLUTION: Underwriters. Mid-South Power is planning to raise $200 million for a new power plant.000 b. $59.33 kp = Dp/Po = $7.886 22. 12.70) = $207.000.70 Proceeds = Number of Shares Sold x Vp = (2.493. The market's annual required rate of return is 14%. how many shares should Mid-South plan to offer for sale? b.400.00/0.700. a. Assume that the issue price of the preferred stock reflected an annual market required rate of return of 6.500. and what is the yield on Allied Preferred if the market price is $50.00 per share? a.000 d.000) .Proceeds to company = ($30 x 10.000 shares.9% ANSWER: c SOLUTION: Vp = Dp/kp = $7. Vp = Dp/kp = $7.00/$50 = 14% 23.00 dividend.07 = $100 Number of Shares Sold = $200.506. 6.000 24. The dividend is expected to grow at 8% per year indefinitely. Based on your answer to part (a).33.00 per year.400. Receipts = Selling price to the public .000 c. Hall Management Corporation has a 40% dividend payout ratio. $240.000/$100 = 2. Allied Milling's preferred stock pays $7.000 b.50 dividend on its shares of common stock.23.000 shares. 2.000) ($103. $58. 1.21.0675 = $103.

40 x E0 $3.07 d. g = 0. 5.08) = $3. ks = 0.08)) / (0.50 = 0.87 c.75 = E P0 = ($3. 7.06 = $63 P/E = 63 / $8.78 / 0. .20 ANSWER: d SOLUTION: D0 = $3.0.4E $8.50 (1.20 © 2004 South-Western.14 . b.08) = $3.08 D1 = $3.75 = 7.78 D0 = 0.20 P0 / E0 = 7. All Rights Reserved.14. 7.50.50 (1.