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Bond Concepts and Valuation.
Here are audio solutions to common bond valuation problems.
a. Audio solution to: You are considering buying bonds in ACBB, Inc. The bonds have a par value of $1,000 and mature in 37 years. The annual coupon rate is 10.0% and the coupon payments are annual. If you believe that the appropriate discount rate for the bonds is 13.0%, what is the value of the bonds to you?
b. Audio solution to: XZYY, Inc. currently has an issue of bonds outstanding that will mature in 31 years. The bonds have a face value of $1,000 and a stated annual coupon rate of 20.0% with annual coupon payments. The bond is currently selling for $890. The bonds may be called in 4 years for 120.0% of the par value. What is your expected quoted annual rate of return if you buy the bonds and hold them until maturity?
c. Audio solution to: Again, Inc. bonds have a par value of $1,000, a 33 year maturity, and an annual coupon rate of 12.0% with annual coupon payments. The bonds are currently selling for $923. The bonds may be called in 4 years for 112.0% of par. What quoted annual rate of return do you expect to earn if you buy the bonds and company calls them when possible?
d. Audio solution to: Within Year, Inc. has bonds outstanding with a $1,000 par value and a maturity of 17 years. The bonds have an annual coupon rate of 17.0% with semi-annual coupon payments. You would expect a quoted annual return of 14.0% if you purchased these bonds. What are the bonds worth to you?
e. Audio solution to: Yes They May, Inc. has a bond issue outstanding with a $1,000 par value and a maturity of 40 years. The bonds have an annual coupon rate of 15.0% with quarterly coupon payments. The current market price for the bonds is $1,035. The bonds may be called in 4 years for 115.0% of par. What is the quoted annual yield-to-maturity for the bonds?
f. Audio solution to: Yes They Can, Inc. has a bond issue outstanding with a $1,000 par value and a maturity of 20 years. The annual coupon rate is 9.0% with semi-annual coupon payments. The bonds are currently selling for $859. The bonds may be called in 3 years for 109.0% of par. What is the quoted annual yield-to-call for these bonds?
g. Audio solution to: You are considering buying bonds in AZYX, Inc. The bonds have a par value of $1,000 and mature in 13 years. The annual coupon rate is 11.0% and the coupon payments are annual. The bonds are currently selling for$1,442.63 based on a yield-to-maturity of 6.0%. What is the bond's current yield?
h. Audio solution to: You are considering buying bonds in AZYX, Inc. The bonds have a par value of $1,000 and mature in 13 years. The annual coupon rate is 11.0% and the coupon payments are annual. The bonds are currently selling for $1,442.63 based on a yield-to-maturity of 6.0%. What is the bond's expected capital gain/loss if the bonds are held until maturity?
i. Audio solution to: Panther Enterprises has outstanding zero coupon bonds that have a face value of $1000 and mature in exactly 18 years. The market price of the bonds is $179.86. What will be the percentage change in the market price of the bonds if the yield to maturity falls by half?
Stock Concepts and Valuation
the Constant Growth Model Video, Valuing Non-Constant Growth Stocks video.
Here are audio solutions to the most common types of stock valuation problems:
a; Audio solution to: Timeless Corporation issued preferred stock with a par value of $700. The stock promised to pay an annual dividend equal to 19.0% of the par value. If the appropriate discount rate for this stock is 10.0%, what is the value of the stock?
b. Audio solution to: Forever, Inc.'s preferred stock has a par value of $1,000 and a dividend equal to 13.0% of the par value. The stock is currently selling for $907.00. What discount rate is being used to value the stock?
c. Audio solution to: Here and After Corporation plans a new issue of preferred stock. Similar risk stock currently offers an annual return to investors of 17.0%. The company wants the stock to sell for $569.00 per share. What annual dividend must the company offer?
d. Audio solution to: You are considering buying common stock in Grow On, Inc. The firm yesterday paid a dividend of $5.20. You have projected that dividends will grow at a rate of 8.0% per year indefinitely. If you want an annual return of 20.0%, what is the most you should pay for the stock now?
e. Audio solution to: You are considering buying common stock in Grow On, Inc. You have projected that the next dividend the company will pay will equal $4.00 and that dividends will grow at a rate of 5.0% per year thereafter. If you would want an annual return of 13.0% to invest in this stock, what is the most you should pay for the stock now?
f. Audio solution to: Growing, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid a dividend of $7.50. You believe that dividends will grow at a rate of 24.0% per year for two years, and then at a rate of 5.0% per year thereafter. You expect an annual rate of return of 18.0% on this investment. If you plan to hold the stock indefinitely, what is the most you would pay for the stock now?
g. Audio solution to: Growing, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid a dividend of $5.60. You believe that dividends will grow at a rate of 24.0% per year for three years, and then at a rate of 10.0% per year thereafter. You expect an annual rate of return of 18.0% on this investment. If you plan to hold the stock indefinitely, what is the most you would pay for the stock now?
h. Audio solution to: Growing, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid a dividend of $8.00. You believe that dividends will grow at a rate of 22.0% per year for years one and two, 15.0% per year for years three and four, and then at a rate of 9.0% per year thereafter. If you expect an annual rate of return of 21.0% on this investment, what is the most you would pay for the stock now?
i. Audio solution to: You are considering buying common stock in Grow On, Inc. You have calculated that the firm's free cash flow was $8.10 million last year. You project that free cash flow will grow at a rate of 6.0% per year indefinitely. The firm currently has outstanding debt and preferred stock with a total market value of $9.22 million. The firm has 1.20 million shares of common stock outstanding. If the firm's cost of capital is 25.0%, what is the most you should pay per share for the stock now?
j. Audio solution to: You are considering buying common stock in Super Growth, Inc. You have calculated that the firm's free cash flow was $6.20 million last year. You project that free cash flow will grow at a rate of 20.0% per year for the next three years, and then 6.0% per year indefinitely thereafter. The firm currently has outstanding debt and preferred stock with a total market value of $26.60 million. The firm has 1.68 million shares of common stock outstanding. If the firm's cost of capital is 19.0%, what is the most you should pay per share for the stock now?
k. Video solution to: Kanine Corp recently reported earnings of $1.5 million. The firm plans to retain 30% of its earnings. The historical return on equity for the firm has been 12%, and this figure is expected to continue in future also. If the firm has 1,000,000 shares outstanding, calculate the price of each share. Assume the company’s beta is 1.2, the risk-free rate is 4% and the market risk premium is 11%. (Hint: The 30% of the company’s earnings that are being retained have some implications for the growth of the company)
Weighted Average Cost of Capital
The video, Costs of Debt and Preferred Stock, the video, Cost of Common Equity, the video, Weights and Final Calculation of the WACC. (Note this video contains a discussion of common errors made in calculating WACC), and the video on WACC; Adjusting for Project Risk and Odds and Ends.
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