Unity University

Department of Accounting & Finance

Financial Management I
Work sheet – On Chapter Four
1. Assume that Nexus Company is considering a bond having a face value of Br 1000 and
coupon interest rate of 8% with remaining years to maturity of 10 years .Calculate the
current yield if the current market price is Birr 920.
2. Purple Company has Br 40,000 par value bonds outstanding at 10% annual coupon
interest. The bonds mature 10 years. Interest is paid annually. Compute the current price
of the bond and record the appropriate journal entries if the bonds were issue at
a) 100
b) 102
c) 97
3. Jupiter Company’s bonds have four years remaining to maturity. Interest is paid annually,
the bonds have a Br 2000 par value and the coupon interest rate is 10%. Compute the
approximate YTM for the bonds if the market price is
a) Br 840
b) Br 1120
4. Consider a company that is paying no dividend on its common stock currently but is
expected to begin paying Br 150 a share five years from now. The stock is expected to be
held for indefinite period of time. The RRR is 12%. Compute the current share price
assuming that the expected dividends in subsequent years :
a) Are also Br 150 per share
b) Will grow at a constant rate of 8% per year forever.
5. Seven Star Company is experiencing a period of rapid growth. Earnings and dividends are
expected to grow at a rate of 15% during the next three years , at 12% in the fourth year,
10% in the fifth year ,and at a constant rate of 8% thereafter. The company’s last dividend
was Br 1.15 and the RRR on the stock is 10%. What is the stock price today?
6. Your broker offers to sell you some shares of Winter Company common stock that paid a
dividend of Br 2 yesterday. You expect the dividend to grow at the rate of 5% per year for
the next three years. if you buy the stock , you will hold it for three years, and then sell it at
Br 37.73 at the end of year 3 . The required rate of return is 12%.
a) Determine the current stock price
b) Is the value of this stock dependent upon how long you plan to hold it?
7. Consider a company that is paying no dividend on its common stock currently but is
expected to begin paying Br 10 a share five years from now. Assume that the expected
dividends in subsequent years are also Br 10 per share. The RRR is 10%. Compute the
current share price.
8. Assume that the firm paid a dividend over the last 12 months of Br 5 per share, which
represents current dividend rate. Dividends are expected to grow by 15% per year over the
 supernormal growth period of 4 years. They will then grow at a normal constant growth
rate of 3%. The RRR is 6%. Compute the current value of the stock.
9. Suppose that the market price of a Br 3,000 par value bond carrying a coupon rate of 9%
and maturing after 8 years is Br 2,700. Interest is paid annually.
a) Was the bond sold at a discount or premium? Why? Explain
b) What rate of return would an investor earn if he buys this bond and holds it till
maturity?
10. Assume the current value of a Br 400,000, 10%, six years term bonds is Br 450,000.
Determine the YTM if interest is paid
a) Annually
b) Quarterly
c) Semi – annually
11. A 20- year, 10% , Br 1,000 bonds pays interest half- yearly is redeemable in twelve years at
a buy-back price of Br 1,150. The bonds current YTM is 9.5% annually. You are required to
determine
a) YTC
b) YTC if the buy-back price is only Br 1,100
c) YTC if instead of 12 years ,the bond can be called in 8 years , buy-back price being Br
1,150
12. You are thinking of buying Fox Company’s share of Br 100 par value that will pay a dividend
of 12% perpetually.
a) What price should you pay for the preference share if you are expecting a return of
10%?
b) Suppose Fox Company can buy back the share at a price of Br 110 in seven years. What
maximum price should you pay for the preference share?
13. An investor is looking for a four – year investment. The share of Zoo Company is selling for
Br 75 a share. They have plans to pay a dividend of Br 7.5 per share each at the end of first
and second years and Br 9 and Br 15 respectively at the end of third and fourth years. If the
investor’s capitalization rate is 12% and share’s price at the end of fourth year is Br 70,
a) What is the value of the share today?
b) Would it be a desirable investment? Why?
14. A Company’s share is currently selling at Br 60 per share. The Company, in the past, paid a
constant dividend of Br 1.50 per share, but it is now expected to grow at 10% compound
rate for over a very long period. Should the share be purchased if RRR is 12%
15. The earnings of a Galaxy Company have been growing at 15% over the past several years
and are expected to increase at this rate for the next seven years and thereafter at 9% in
perpetuity. It is earning Br 4 per share and paying Br 2 per share as dividend. What shall be
the present value of the share with a discount rate of 12% for the first seven years and 10%
thereafter?