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Exercises Valuation

The document contains 10 exercises involving calculations related to bond valuation, stock valuation, capital raising, and liquidation value. Exercise 1 involves calculating bond values given different required returns. Exercise 2 involves calculating bond yields. Exercise 3 requires calculating present values of asset payment streams. Exercise 4 values a bond. The remaining exercises involve additional bond and stock calculations, capital raising, and liquidation value.

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QP1100 Nguyen Nhat Minh
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31 views3 pages

Exercises Valuation

The document contains 10 exercises involving calculations related to bond valuation, stock valuation, capital raising, and liquidation value. Exercise 1 involves calculating bond values given different required returns. Exercise 2 involves calculating bond yields. Exercise 3 requires calculating present values of asset payment streams. Exercise 4 values a bond. The remaining exercises involve additional bond and stock calculations, capital raising, and liquidation value.

Uploaded by

QP1100 Nguyen Nhat Minh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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EXERCISES

1. Lahey Industries has outstanding a $1,000 par-value bond with an 8% coupon interest rate. The
bond has 12 years remaining to its maturity date.
a. If interest is paid annually, find the value of the bond when the required return is (1) 7%, (2) 8%,
and (3) 10%.
b. Indicate for each case in part a whether the bond is selling at a discount, at a premium, or at its
par value.
c. Using the 10% required return, find the bond’s value when interest is paid semiannually.
2. Elliot Enterprises’ bonds currently sell or $1,150, have an 11% coupon interest rate and a $1,000
par value, pay interest annually, and have 18 years to maturity.
a. Calculate the bonds’ current yield.

b. Calculate the bonds’ yield to maturity (YTM).

c. Compare the YTM calculated in part b to the bonds’ coupon interest rate and current yield
(calculated in part a). Use a comparison of the bonds’ current price and par value to explain these
differences.

3. You have two assets and must calculate their values today based on their different payment
streams and appropriate required returns. Asset 1 has a required return
of 15% and will produce a stream of $500 at the end of each year indefinitely. Asset 2 has a
required return of 10% and will produce an end-of-year cash flow of $1,200 in the first year,
$1,500 in the second year, and $850 in its third and final year.
4. A bond with 5 years to maturity and a coupon rate of 6% has a par, or face, value of $20,000.
Interest is paid annually. If you required a return of 8% on this bond, what is the value of this
bond to you?
5. Assume a 5-year Treasury bond has a coupon rate of 4.5%.
a. Give examples of required rates of return that would make the bond sell at a discount, at a
premium, and at par.
b. If this bond’s par value is $10,000, calculate the differing values for this bond given the required
rates you chose in part a.
6. Aspin Corporation’s charter authorizes issuance of 2,000,000 shares of common stock. Currently,
1,400,000 shares are outstanding, and 100,000 shares are being held as treasury stock. The firm
wishes to raise $48,000,000 for a plant expansion. Discussions with its investment bankers
indicate that the sale of new common stock will net the firm $60 per share.
a. What is the maximum number of new shares of common stock that the firm can sell without
receiving further authorization from shareholders?
b. Judging on the basis of the data given and your finding in part a, will the firm be able to raise the
needed funds without receiving further authorization?
c. What must the firm do to obtain authorization to issue more than the number of shares found in
part a?
7. Valerian Corp. convertible preferred stock has a fixed conversion ratio of 5 common shares per 1
share of preferred stock. The preferred stock pays a dividend of $10.00 per share per year. The
common stock currently sells for $20.00 per share and pays a dividend of $1.00 per share per
year.
a. Judging on the basis of the conversion ratio and the price of the common shares, what is the
current conversion value of each preferred share?
b. If the preferred shares are selling at $96.00 each, should an investor convert the preferred shares
to common shares?
c. What factors might cause an investor not to convert from preferred to common stock?
8. You are a financial analyst for Elite Investment Company, and you are looking for undervalued
securities. After searching the market, you identify Stock A and Stock B as potential purchases.
Stock A is currently selling at $100 with an expected dividend of $6 and constant growth rate of
5%, while Stock B is a preferred stock, currently selling at $60 with a $5 dividend paid each year.
Answer the following questions on the basis that you believe the required rates of return for both
stocks should be 10%:
a. How much would you pay for Stock A?
b. How much would you pay for Stock B?
c. Which security is undervalued? Why?
9. Sweet Candy will pay a dividend of $0.72 next year. The CEO of the company declared that the
company would maintain a constant growth rate of 7% per year every year from now on.
a. How much will you pay for the stock if your required return is 10%?
b. How much will you pay for the stock if your required return is 8%?
c. Based on your answer in parts a and b, give one disadvantage of the constant growth model.
10. The balance sheet for Gallinas Industries is as follows.

Additional information with respect to the firm is available:

(1) Preferred stock can be liquidated at book value.

(2) Accounts receivable and inventories can be liquidated at 90% of book value.

(3) The firm has 10,000 shares of common stock outstanding.

(4) All interest and dividends are currently paid up.

(5) Land and buildings can be liquidated at 130% of book value.

(6) Machinery and equipment can be liquidated at 70% of book value.

(7) Cash and marketable securities can be liquidated at book value.

Given this information, answer the following:

a. What is Gallinas Industries’ book value per share?


b. What is its liquidation value per share?
c. Compare, contrast, and discuss the values found in parts a and b.

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