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Financial Market Problems and Formulas

This document provides problems and instructions related to valuation of financial instruments such as bonds and stocks. It includes 6 problems involving calculations of current yield, bond price, coupon rate, yield to maturity, preferred stock yield, and constant growth stock valuation. It also provides relevant formulas for time value of money, bond valuation, stock valuation under various growth assumptions, and calculating cost of equity. Solutions require showing computations and boxing the final numeric answer.

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Nufayl Kato
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347 views3 pages

Financial Market Problems and Formulas

This document provides problems and instructions related to valuation of financial instruments such as bonds and stocks. It includes 6 problems involving calculations of current yield, bond price, coupon rate, yield to maturity, preferred stock yield, and constant growth stock valuation. It also provides relevant formulas for time value of money, bond valuation, stock valuation under various growth assumptions, and calculating cost of equity. Solutions require showing computations and boxing the final numeric answer.

Uploaded by

Nufayl Kato
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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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

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