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Unformatted text preview: E ngineering 111 Winter 2011 Assignment #4 Bond and Stock Valuation I nst ructions: Submit the file through Courseweb with your name and student ID as the document title (i.e. Joe_Bruin_1020203.doc or Joe_Bruin_1020203.pdf). You must follow this convention to receive full credit. You must also show all your work for any questions that require calculations. Back Story: "Get r ich quick!", "I'll give you ten of the HOTTEST PENNY STOCKS THAT WIL L MAKE YOU A M I L L IONARE OVERNIGHT". You're bombarded daily by spam in your inbox that makes p romises of fame, fortune, and financial security. What these t r icksters fail to realize is that you're a graduate of the King-Bristow school of finance. Sound financial decisions require looking a t the data, running calculations, and doing your homework! You clear out the spam emails and look at a summary of a client's portfolio. You know you can do some optimization work on this portfolio. And it'll take more work than listening to the hot s tock p icks of a crazy email. Assignment:  Your client is currently the holder of a zero-coupon corporate bond with a face value of $1000, 5 years to maturi ty, and a yield to maturi ty of 7%. At what price is the bond t rading?  You decide to call the corporate bond t rader at your company’s headquar ters. The t rader quotes a semiannual corporate bond with 10 years to matur ity and a $1000 face value has a 10% coupon. The issuer’s rating has just been upgraded and the bond is t rading at $1050. What is the y ield to maturi ty on this bond? [ 3] A fter screening through hundreds of stocks, you narrow down your choices to stock XYZ. Stock X YZ has EPS of $2.50 and a retention ratio of 70%, with an expected earnings growth rate of 3% annually. Given the results from  and , what discount rate would you use? What is the value of XYZ based on dividends alone? ...
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This note was uploaded on 03/28/2011 for the course ENGR 110 taught by Professor . during the Winter '10 term at UCLA.
- Winter '10