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Unformatted text preview: bonds equal to the required return; the required return can be observed in the market by finding the YTM on outstanding bonds of the company. Enter 40 N I/Y 4.650% ±$1,063 PV $50 PMT $1,000 FV Solve for 4.650% × 2 = 9.30% 20. Current yield = .0842 = $90/P0 ; P0 = $1,068.88 Enter Solve for 8 years 21. Enter N 8.0004 7.81% I/Y ±$1,068.88 PV $90 PMT $1,000 FV 20 N Solve for 5.171% × 2 = 10.34% 23. Bond P P0 Enter 5 N Solve for P1 Enter 4 N I/Y 5.171% ±$871.55 PV $41.25 PMT $1,000 FV 7% I/Y PV $1,082.00 $90 PMT $1,000 FV $90 PV PMT Solve for $1,067.74 Current yield = $90 / $1,082.00 = 8.32% Capital gains yield = ($1,067.74 – 1,082.00) / $1,082.00 = –1.32% Bond D P0 Enter Solve for P1 Enter 4 N 7% I/Y 7% I/Y $1,000 FV 5 N 7% I/Y PV $918.00 $50 PMT $1,000 FV Solve for Current yield = $50 / $918.00 = 5.45% Capital gains yield = ($932.26 – 918.00) / $918.00 = +1.55% All else held constant, premium bonds pay a higher current income while having price depreciation as maturity nears; discount bonds pay a lower current income but have price appreciation as maturity nears. For either bond, the total return is still 7%, but this return is distributed differently between current income and capital gains. PV $932.26 $50 PMT $1,000 FV 235 24. a. Enter I/Y Solve for 7.01% This is the rate of return you expect to earn on your investment when you purchase the bond. b. Enter Solve for The HPY is: Enter I/Y Solve for 9.81% The realized HPY is greater than the expected YTM when the bond was bought because interest rates dropped by 1 percent; bond prices rise when yields fall. 25. PM CFo $0 C01 $0 F01 12 C02 $800 F02 16 C03 $1,000 F03 11 C04 $21,000 F04 1 I = 4% NPV CPT $13,117.88 PN Enter Solve for 40 N 4% I/Y $20,000 FV 2 N ±$1,140 PV $90 PMT $1,185.17 FV 8 N 6.01% I/Y $90 PMT $1,000 FV 10 N ±$1,140 PV $90 PMT $1,000 FV PV $1,185.87 PV $4,165.78 PMT 29. Real return for stock account: 1 + .12 = (1 + r)(1 + .04); r = 7.6923% Enter 7.6923% 12 NOM EFF C/Y Solve for 7.4337% Real return for bond account: 1 + .07 = (1 + r)(1 + .04); r = 2.8846% Enter 2.8846% 12 NOM EFF C/Y Solve for 2.8472% 236 Real return postretirement: 1 + .08 = (1 + r)(1 + .04); r = 3.8462% Enter 3.8462% 12 NOM EFF C/Y Solve for 3.7800% Stock portfolio value: Enter 12 × 30 N Solve for Bond portfolio value: Enter 12 × 30 N Solve for 7.4337% / 12 I/Y $800 PMT PV FV $1,063,761.7 5 2.8472% / 12 I/Y PV $400 PMT FV $227,089.04 Retirement value = $1,063,761.75 + 227,089.04 = $1,290,850.79 Retirement withdrawal: Enter 25 × 12 N Solve for The last withdrawal in real terms is: Enter 30 + 25 4% N I/Y Solve for 30. Future value of savings: Year 1: Enter 4 N Solve for Year 2: Enter Solve for Year 3: Enter Solve for Year 4: Enter Solve for 1 N 9% I/Y $274,049.82 PV 2 N 9% I/Y $245,773.24 PV 3 N $6,657.74 PV 3.7800% / 12 I/Y $1,290,850.7 9 PV PMT $6,657.74 FV PMT FV $57,565.30 9% I/Y $196,450 PV PMT FV $277,305.21 9% I/Y $219,976.81 PV PMT FV $284,876.35 PMT FV $292,003.18 PMT FV $298,714.31 237 Future value = $277,305.21 + 284,876.35 + 292,003.18 + 298,714.31 + 305,036.49 Future value = $1,457,935.54 He will spend $500,000 on a luxury boat, so the value of his account will be: Value of account = $1,457,935.54 – 500,000 Value of account = $957,935.54 Enter Solve for 25 N 9% I/Y $957,935.54 PV PMT $97,523.83 FV 238 CHAPTER 9 STOCK VALUATION
Answers to Concept Questions 1. 2. 3. The value of any investment depends on the present value of its cash flows; i.e., what investors will actually receive. The cash flows from a share of stock are the dividends. Investors believe the company will eventually start paying dividends (or be sold to another company). In general, companies that need the cash will often forgo dividends since dividends are a cash expense. Young, growing companies with profitable investment opportunities are one example; another example is a company in financial distress. This question is examined in depth in a later chapter. The general method for valuing a share of stock is to find the present value of all expected future dividends. The dividend growth model presented in the text is only valid (i) if dividends are expected to occur forever; that is, the stock provides dividends in perpetuity, and (ii) if a constant growth rate of dividends occurs forever. A violation of the first assumption might be a company that is expected to cease operations and dissolve itself some finite number of years from now. The stock of such a company would be valued by applying the general method of valuation explained in this chapter. A violation of the second assumption might be a startup firm that isn’t currently paying any dividends, but is expected to eventually start making dividend payments some number of years from now. This stock would also be valued by the general dividend valuation method explained in this chapter. The common stock probably has a higher price because the dividend can grow, whereas it is fixed on the preferred. However, the preferred is les...
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 Spring '10
 eshmalwi
 Finance, Corporate Finance

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