Financial Market (Stocks and Bond Valuation)

PROBLEM SOLVING.
Instructions: Read and understand each problem, provide what is ask. On a paper, show all the
necessary computations to support your answer; box your final answer. Scan each paper and save in
one pdf file only. Name the files as LASTNAME FT_SW2. Good luck.

Current Yield
NO. 1.A 12-year bond pays an annual coupon of 8.5 percent. The bond has a yield to maturity of
9.60 percent and a par value of P1, 000. What is the bond’s current yield?

Bond Value
NO. 2.A 10-year bond with a 9 percent semiannual coupon is currently selling at par. A 10-year
bond with a 9 percent annual coupon has the same risk, and therefore, the same effective
annual return as the semiannual bond. If the annual coupon bond has a face value of P1, 200,
what will be its price?

Coupon rate
NO. 3.Cold Boxes Ltd. has 100 bonds outstanding (maturity value = P1, 000). The nominal required
rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The
bonds mature in 5 years, and their current market value is P768 per bond. What is the annual
coupon interest rate?

YTM
NO. 4.Palmer Products has outstanding bonds with an annual 8 percent coupon. The bonds have a
par value of P1, 000 and a price of P865. The bonds will mature in 11 years. What is the yield to
maturity on the bonds?

Preferred stock yield

NO. 5. A share of preferred stock pays a quarterly dividend of P2.50. If the price of this preferred
stock is currently P50, what is the nominal annual rate of return

Constant growth stock

NO. 6. A stock that currently trades for P40 per share is expected to pay a year-end dividend of P2 per
share. The dividend is expected to grow at a constant rate over time. The stock has a beta of 1.2,
the risk-free rate is 5 percent, and the market risk premium is 5 percent. What is the stocks
expected price seven years from today?

Constant g value: CAPM

NO. 7.Sunny Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected
to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the
required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's
current stock price?

Constant growth dividend

NO. 8.Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share.
Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend,
D0?

Non- constant growth valuation

NO. 9.Bachman Industries just paid a dividend of D0 = $1.32. Analysts expect the company's
dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and
thereafter. The required return on this low risk stock is 9.00%. What is the best estimate of the
stock’s current market value?

1
FORMULAS ( for Reference)

TIME VALUE FACTORS BOND VALUATION

Present Value of 1 = ( 1 + ) P= + +… + + or
(1+ )1 (1+ )2 (1+ ) (ퟏ+풊)풏

Future Value of 1 = 1 ÷ ( 1 + )
P = Coupon x PVOA of 1 + Face Value of
the Bond x PV of 1
FV Ordinary Annuity of 1 = [ (1+ ) −1
]
퐹푉−푃푉
+
YTM =
FV Annuity Due of 1 =FVOA x ( 1 + i ) 퐹푉−푃푉
2
1
1− ิิ 푃‫݅ ݎ‬푒−푀‫ݎ‬n푒L푉ิi푒
(1+ ) MinM +푁i푚푏푒‫ ݎ‬M푓 푌푒‫ݎ‬푠 i L ิ ิิ
PVOA of 1 = [ ] YTC =
ิิ 푃‫݅ ݎ‬푒+푀‫ݎ‬n푒L 푃‫݅ ݎ‬푒
2
PV Annuity Due of 1 = PVOA X (1 +i) Coupon rate x Face Value
Current Yield =
푀‫ݎ‬n푒L 푃‫݅ ݎ‬푒

FORMULAS FOR FUNDAMENTAL ANALYSIS: STOCK VALUATION:

Note: M‫ ݎ‬푒‫ݔ‬n푒݅L푒ܿ ܿ ܿ푒 ܿ ⹨ 풏 ݅ 풊 ݅ = ܿ푒 L ิ푠L n푒‫ ݎ‬Mܿ ‫( ݔ‬1 + ),

Example: D1 = D0 X (1 + g), D2 = D1 X (1 + g) and D3 = D2 X (1 + g)
so on.
k = cost of capital or required rate of return;
g = growth rate
푃0 = Intrinsic Value of the Stock or Stock Price at current period
푃 = Expected Stock Price at n period
k = cost of capital or required rate return

INTRINSIC VALUE OF THE STOCK OR CURRENT STOCK PRICE( )

1 (one)Year holding
D +P
P0= 1 1
1+ k

More than 1 holding Period

D1 D D Pn
P0 = + 2 + .. n +
(1+ k)2 (1+ k)2 (1+ k)n (1+k)n

Infinite (Unlimited) Holding Period

D1 D D∞ 푃
P0 = + 2 + .. + ∞
(1+ k)1 (1+ k)2 (1+ k)∞ (1+k)∞

Constant growth
D
P0 = 1
k−g

2
Non - Constant growth (from the start) and Constant growth (towards the end)
D1 D Dn P
P0 = + 2 + ..
(1+ k)1 (1+ k)2
+ n
(1+ k)n (1+ k)n

Dn
࣎݅ ݅ ∶ =
k−g

Dividend yield
DY= D1/P0

COST OF CAPITAL: COST OF EQUITY(k)

Common Stock: (Cost Of Common Stock)
 Using CAPM: n݅푠 = Risk Free + Beta x {(Market Premium or Return – Risk
Free)}
= Rf + B x (MP- RF)
or : = Rf + B x MRP where: The market risk premium, kM – kRF
 Using Gordon Growth model: = D1 + g
P0

Preferred Stock: ( Cost of Preferred Stock)

= Dividend per share / Net Proceeds