PROBLEMS - Chapter 3 + 4

1. A Microgates Industries bond has a 10 percent coupon rate and a $1000 face value.
Interest is paid semiannually, and the bond has 20 years to maturity. If investors require a
12 percent yield, what is the bond’s value?

2. A Macro Corp. bond carries an 8 percent coupon, paid semi-annually. The par value is
$1000, and the bond matures in six years. If the bond currently sells for $911.37, what is
its yield to maturity?

3. You have just purchased a 7-year zero-coupon bond with a yield to maturity of 11%
and a par value of $1000. What would your rate of return at the end of the year be if you
sell the bond? Assume the yield to maturity on the bond is 9% at the time you sell.

4. A coupon bond that pays interest annually, has a par value of $1000, matures in 5
years, and has a yield to maturity of 10%. What is the intrinsic value of the bond today if
the coupon rate is 12%.

5. You are considering acquiring a common stock that you would like to hold for one
year. You expect to receive both $0.75 in dividends and $16 from the sale of the stock at
the end of the year. What is the maximum price you would pay for the stock today if you
wanted to earn a 12% return.

6. A coupon bond that pays interest of $100 annually has a par value of $1000, matures in
5 years, and is selling today at a $72 discount from par value, what is its yield to
maturity?

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7. A coupon bond pays annual interest, has a par value of $1000, matures in 4 years, has a
coupon rate of 8.25%, and has a yield to maturity of 8.64%. What is the current yield on
this bond?

8. Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The
risk-free rate of return is 4% and the expected return on the market portfolio is 14%.
Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The
beta of Sure Tool Company's stock is 1.25.
- What is the intrinsic value of Sure's stock today?
- If Sure's intrinsic value is $21 today, what must be its growth rate?

9. Sales Company paid a $1 dividend per share last year and is expected to continue to
pay out 40% of earnings as dividends for the foreseeable future. If the firm is expected to
generate a 10% return on equity in the future, and if you require a 12% return on the
stock. What is the value of this stock?

10. The growth in dividends of ABC, Inc. is expected to be 15%/year for the next three
years, followed by a growth rate of 8%/year for two years; after this five year period, the
growth in dividends is expected to be 3%/year, indefinitely. The required rate of return on
ABC, Inc. is 13%. Last year's dividends per share were $1.85. What should the stock sell
for today?

11. If a firm's required rate of return equals the firm's return on equity, there is no
advantage to increasing the firm's growth. Suppose a no-growth firm had a required rate
of return and a ROE of 12% and a stock price of $40. However, if the firm is able to
increase the ROE to 15% with a plowback ratio of 50%, what is the present value of
growth opportunities now? (Last year's dividends were $2.00/share).

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12. Suppose that the average P/E multiple in the oil industry is 22. Exxon Oil is expected
to have an EPS of $1.50 in the coming year. What is the intrinsic value of Exxon Oil
stock?

13. IBX’s stock dividend at the end of this year is expected to be $2.15, and it is expected
to grow at 11.2% per year forever. If the required rate of return on IBX stock is 15.2% per
year, what is its intrinsic value?
If IBX’s current market price is equal to this intrinsic value, what is next year’s expected
price?

14. You purchased an annual interest coupon bond one year ago that now has 6 years
remaining until maturity. The coupon rate of interest was 10% and par value was $1000.
At the time you purchased the bond, the yield to maturity was 8%. What was the amount
you paid for this bond one year ago?

15 . The Brigap Co. has just paid a cash dividend of $2 per share. Investors require a 16
percent return from investments such as this. If the dividend is expected to grow at a
steady 8 percent per year, what is the current value of the stock? What will the stock be
worth in five years?
Suppose we observe a stock selling for $40 per share. The next dividend will be $1 per
share, and you think the dividend will grow at 12 percent per year forever. What is the
dividend yield in this case ? The total required return ?