SOLUTIONS CHAPTER 10

# SOLUTIONS CHAPTER 10 - CHAPTER 10 VALUATION 10.1 By...

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CHAPTER 10 VALUATION 10.1 By financial calculator: (a) \$843.52 (FV=1000;PMT=110;N=10;IY=14;PY=1;CPT PV) (b) \$1061.45 (c) \$1000.00 (d) \$1128.35 10.2 By financial calculator: (a) \$1376.54 (FV=1000;PMT=40;N=40;IY=5;PY=2;CPT PV) (b) \$1000.00 (c) \$828.41 10.3 By financial calculator: (a) \$981.82 (FV=1000;PMT=90;N=1;IY=11;PY=1;CPT PV) (b) \$926.08 (c) \$882.22 (d) \$840.73 (e) \$826.12 10.4 Annual coupon interest = Coupon interest rate x par value of \$1000 = .09 x \$1000 = 90 10.5 Since the yield to maturity on the bond equals the coupon interest rate, the bond’s present value or current price must equal its par value of \$1000. 10.6 By financial calculator, the correct market price is: N = 40 (or 4 quarters per year times 10 years) IY = 13 (or the required market yield to maturity of the bond) PMT = \$25 (or coupon interest rate of 10% times par value of \$1000 = \$100 per year and \$25 per quarter since interest is paid quarterly) FV = \$1000 (principal or par to be received by the bondholder at maturity) PY = 4 (or the number of compounding periods per year) CPT, PV = \$833.44 So the Sally Ruth Corporate bond is overpriced by (884 – 833.44) or \$50.56. If William buys this bond at the \$884 price, he will not earn the market yield to maturity of 13%. Instead, his yield to maturity (by financial calculator, solving for IY with a PV of \$884) would be 12%. 10-7 P p or Price of Preferred Stock = D p /K p or annual \$ dividend divided by the investor’s required return. P p = \$3.00 / .095 = \$31.58 per share of preferred stock

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10-8 Find the price of preferred stock as shown in problem 10-7 above. (a) \$75.00 or \$6.00 / .08 (b) \$60.00 (c) \$50.00 10.9 P o = D c K e P o = \$3.50 / .12 P o = \$29.17 Where: P o = Current Price of Common Stock D c = Constant Dividend per share (since no growth) K e = Common stockholder’s required return 10-10 P 0 = D 1 / (K e - g) P 0 = \$4.30 / (.15 - .05) P 0 = \$43.00 per common share Where: P 0 = Current common stock price D 1 = Expected dividend per common share next year K e = Investor’s required return commensurate with risk g = Firm’s expected constant growth rate in earnings 10-11 (a) P 0 = \$3.10 / (.13 - .03) = \$31 per share (see 10-10) (b) P 0 = \$3.10 / (.18 - .03) = \$20.67 per share (see 10-10) (c) P 0 = \$3.10 / (.13 - .06) = \$44.29 per share (see 10-10) (d) P 0 = \$3.80 / (.13 - .03) = \$38 per share (see 10-10) 10.12 P 0 = D 1 / (K e - g) D 1 = Last year’s dividend or D 0 times (1 + g) D 1 = \$5.00 x (1 + .06) = \$5.30 dividend per share next year P 0 = \$5.30 / (.15 - .06) P 0 = \$58.89 per common share 10-13 P 0 = D 1 / (K e - g) (see problem 10-12) D 1 = Last year’s dividend or D 0 times (1 + g) D 1 = \$0.50 x (1 + .03) = \$0.52 dividend per share next year P 0 = \$0.515 / (.12 - .03) P 0 = \$5.72 per common share
10-14 P 0 = D 1 / (K e

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