Valuation Problems: Stocks, Bonds, and Other Investments

1. What are the values ofthe three investments:

a. Stock in which you expect a dividend of $300 a year indefinitely. You feel you
should obtain a 10% return based on the risk you are taking /) I-

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b. Painting that you expect to sell for $300,000 in 5 years. You feel you should obtain a
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c. A parking lot that generated $40,000 in cash flow last year (time period 0). The cash
flows are expected to grow at 4% per year. The required return is 11 percent.
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2. Cemex, a large cement provider, issued a 1 _percentcoupon interest rate, 10-year ~ /- '"
bond with a $1,000 par value. The market ra for a bond like this (risk level of
company and maturity rate) is 11 percent. The ompany is selling 100,000 of these
bonds. How much should these bonds sell for i the marketplace? Excluding
transaction costs, how much will Cemex collect? PMf-:::-lfJJ
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ou decide to b M bonds that are selling in the open market for $950. The
coupon rate s 8 percent. ~e bonds mature in 10 years. What is the Yield-to-

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 4. You just bought IBM bonds that mature in twenty years. You paid $1,000 (par
value). The bonds have a coupon rate of8 percent. If interest rates fall and the.
reqUired return on yonr bond is now 6 pereent, what is the value of your bond?

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V 5. You also own an IBM bond that matures in two years. Let's assume it is selling for
$1,000 on the open market and has a coupon rate of8 percent. If interest rates fall
and the required return on your bond is now 6 percent, what is the value of your bond
iin reality, 4 and 5 would not oeenr at tbe same time)? f'V -:;. Xc

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6. Look at the new value of the bonds in problems 4 and 5. The same change in interest
rates occurred. Did the value of the bonds change the same amount? Can you make
sense of this?

7. Using the Gordon Model, calculate the value of the following stock. The required
retum is 9.5%. The dividend growth rate = 7%. The dividend one period out is

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8. Assume in the above problem that the company has just landed a major account in
Asia. Assume the risk level of the company hasn't changed but the expected growth
indiVidendSisexpectedtogrowat9percent 'DiVid endS one period out = $2.81.

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cP at is the value of the stock using the Gordon Growth Model?
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9. What are the limitations of the Gordon Growth Model?

 10. Using the above problems, explain how taking on a new project (e.g., Asia) can
increase or decrease the value of a stock.

11. Alligators R Us is contemplating expansion through the issuance of debtlbonds. Your

broker calls you and suggests that you buy 10 bonds-price $1,150 for each bond, 11
percent coupon rate, $1,000 par value, interest paid annually. The bonds mature in
12 years. Calculate the Yield-to-Maturity (YTM). Are the bonds selling at a discount

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12. The average PE ratio for s . nauctor stoc s IS O. Triquint Semiconductor
(TQNT) has average risk and growth prospects compared to the rest of the industry.
Ifthe company has Earnings Per Share of $2.00, what would be a fair stock price? If
the company has 140,000,000 shares outstanding, what would be a fair market
capitalization (aka market cap) for TQNT. What was Triquint's Net Income?

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 Solutions

la. Solution: $3,000

lb. Solution: $120,563

lc. Solution: $628,571

2. Solution: $941.92 Market Value; $94,192,000 collected

3. Solution: 8.77% PV = -$950, n = 10, pmt = $80, FV = $1,000, CPT = T/Y

4. Solution: $1,229

5. Solution: $1,037

7. Solution: $110.40-- $2.76/(.095-.07)

8. Solution: $562.00

11. Solution: 8.91%, premium; premium> $1,000, discount < $1,000

12. Solution: $40 per share; $5.6 billion market cap; $280,000,000 Net Income