AF09107 BUSINESS ANALYSIS AND VALUATION

23RD FEBRUARY 2020

TUTORIAL QUESTIONS

1. What does it mean when someone says a bond is selling “at par”? At “discount”? At “a
premium”?

2. What is the value of a ten-year, $100,000 corporate bond that returns $5,600 interest once
per year? Assume bonds of similar quality, that is, risk, yield 8%.

3. A Microgates Industries bond has a 10 percent coupon rate and a $1,000 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?

4. A Macrohard Corp. bond carries an 8 percent coupon, paid semiannually. The par value
is $1,000, and the bond matures in six years. If the bond currently sells for $911.37, what
is its yield to maturity?

5. Bond J has a 4% coupon and Bond K a 10% coupon. Both have 10 years to maturity,
make semiannual payments, and have 9% YTMs. If market rates rise by 2%, what is the
percentage price change of these bonds? If rates fall by 2%? What does this say about the
risk of lower-coupon bonds?

6. Telecom Tanzania Ltd issued a 20 year bond with a coupon rate of 9%, selling to yield
12% interest rate par annum. Calculate the price of the bond. If the financial analyst in
the Tanzania Communication Commission suggests that the yield basis should be 10%,
what is the price of the new bond?

7. Suppose a $1,000 par value bond with 9 years remaining until maturity has a coupon rate
of 6% and a market price of $1,000 (the bond is currently selling for $1,000). What is the
yield-to-maturity of this bond?

8. Suppose a $1,000 par value bond with 9 years remaining until maturity has a coupon rate
of 6% and a market price of $950 (the bond is currently selling for $950). What is the
yield-to-maturity of this bond?

9. Suppose an 8% coupon, 30-year bond is selling at TZS1,276.76. What average rate of

return would be earned by an investor purchasing the bond at this price?

10. Suppose a bond currently sells for $932.90. It pays an annual coupon of $70, and it
matures in 10 years. It has a face value of $1000. What are its coupon rate, current yield,
and yield to maturity (YTM)?
 AF09107 BUSINESS ANALYSIS AND VALUATION
23RD FEBRUARY 2020
TUTORIAL QUESTIONS

11. The next dividend for the Gordon Growth Company will be $4 per share. Investors
require a 16 percent return on companies such as Gordon. Gordon’s dividend increases
by 6 percent every year. Based on the dividend growth model, what is the value of
Gordon’s stock today? What is the value in four years?

12. The Brigapenski 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?

13. Chain Reaction, Inc., has been growing at a phenomenal rate of 30 percent per year
because of its rapid expansion and explosive sales. You believe this growth rate will last
for three more years and will then drop to 10 percent per year. If the growth rate then
remains at 10 percent indefinitely, what is the total value of the stock? Total dividends
just paid were $5 million, and the required return is 20 percent.

14. Joel Williams follows Sonoco Products Company (NYSE: SON), a manufacturer ofpaper
and plastic packaging for both consumer and industrial use. SON appears to have a
dividend policy of recognizing sustainable increases in the level of earnings with
increases in dividends, keeping the dividend payout ratio within a range of 40 percent to
60 percent. Williams also notes:
• SON’s most recent quarterly dividend (ex-dividend date: 15 August 2007) was $0.26,
consistent with a current annual dividend of 4 x $0.26 = $1.04 per year.
• SON’s forecasted dividend growth rate is 6.0 percent per year.
• With a beta (βi) of 1.13, given an equity risk premium (expected excess return of equities
over the risk-free rate, E [RM] – RF) of 4.5 percent and a risk-free rate (RF) of 5 percent.
Williams believes the Gordon growth model may be an appropriate model for valuing SON.
i) Calculate the Gordon growth model value for SON stock.
ii) The current market price of SON stock is $30.18. Using your answer to question 1, judge
whether SON stock is fairly valued, undervalued, or overvalued.