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
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10-14 P 0 = D 1 / (K e
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