accounting111 - A1(Bond valuation A $1,000 face value bond...

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A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond's coupon rate is 7.4%. What is the fair value of this bond? Solution: Calculating PV factor i= required return = 9% = 0.09 n= 10 years Using Coupon Rate to calculate present value of Annuity, Using Cash Flow of $1000 to calculate present value, Cash flow= $1000 * 7.4/100 = $74 Cash flow= $1000 PV factor = (1/i)*(1- 1/(1+i)^n) = 6.4176 PV factor = 1/(1+i)^n = 0.42241 So, PV = $74*6.4176 474.9024 So, PV = $1000*0.42241= 422.41 So the fair value of bond = 474.9024+422.41 = $897.31 A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%? Solution: D1( Cash Dividend)= $5.60 r(Required return on RHM)= 0.10 g(rate of growth)= 0.06 P0(current market value)= D1/(r-g) = $140.00 A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The preferred dividend is nongrowing. What is the required return on James River preferred stock? Solution: D(Dividend)= $3.38 P(Current $45.25
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Price)= Required Return= D/P= 0.074696 7.46% A14. (Stock valuation) Suppose Toyota has nonmaturing (perpetual) preferred stock outstanding that pays a $1.00 quarterly dividend and has a required return of 12% APR (3% per quarter). What is the stock worth? Solution: D(Dividend)= $1.00 r(Required Return)= 0.03 P(Price of stock)= D/r = 33.33333 The worth of stock is calculated by dividing the dividend which is $1 by required return which is 3% i.e. 0.03 APR (Annual percentage return) which is 12%. Hence quarterly return is 12%/4 = 3% (Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose PhilElÂ’s bonds have identical coupon rates of 9.125% but that one issue matures in 1 year, one in 7 years, and the third in 15 years. Assume that a coupon payment was made yesterday.
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