Barry’s Steroids Company has $1,000 par value bonds outstanding at 13 percent interest. The bonds will mature in 40 years.
| Barry’s Steroids Company has $1,000 par value bonds outstanding at 13 percent interest. The bonds will mature in 40 years. |
| If the percent yield to maturity is 10 percent, what percent of the total bond value does the repayment of principal represent? Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) |
Principal as a percentage of bond price %
2.
value: 2.00 points
| Refer to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) decline from 20 percent to 10 percent. |
| a. | What is the bond price at 20 percent? |
| Bond price | $ |
| b. | What is the bond price at 10 percent? |
| Bond price | $ |
| c. | What would be your percentage return on investment if you bought when rates were 20 percent and sold when rates were 10 percent? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Enter the value as a positive amount.) |
| Return on investment | % |
3.
value: 1.00 points
| Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 20-year life when issued and the annual interest payment was then 13 percent. This return was in line with the required returns by bondholders at that point as described below: |
| Real rate of return | 4 | % |
| Inflation premium | 5 | |
| Risk premium | 4 | |
| Total return | 13 | % |
| Assume that five years later the inflation premium is only 3 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 15 years remaining until maturity. |
| Compute the new price of the bond. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) |
| New price of the bond | $ |
4.
value: 2.00 points
| Katie Pairy Fruits Inc. has a $2,400, 16-year bond outstanding with a nominal yield of 17 percent (coupon equals 17% × $2,400 = $408 per year). Assume that the current market-required interest rate on similar bonds is now only 12 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. |
| a. | Compute the current price of the bond. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) |
| Current price of the bond | $ |
| b. | Find the present value of 5 percent × $2,400 (or $120) for 16 years at 12 percent. The $120 is assumed to be an annual payment. Add this value to $2,400. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) |
| Present value | $ |
5.
value: 2.00 points
| Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 8 percent annual interest and has 17 years remaining to maturity. The current yield to maturity on similar bonds is 13 percent. |
| a. | What is the current price of the bonds? Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) |
| Current price of the bond | $ |
| b. | By what percent will the price of the bonds increase between now and maturity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) |
| Price increases by | % |
6.
value: 2.00 points
| You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 8 percent, which is paid semiannually. The yield to maturity on the bonds is 10 percent annual interest. There are 20 years to maturity. Use Appendix B andAppendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. |
| a. | Compute the price of the bonds based on semiannual analysis. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) |
| Bond price | $ |
| b. | With 15 years to maturity, if yield to maturity goes down substantially to 6 percent, what will be the new price of the bonds? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) |
| New bond price | $ |
rev: 02_11_2015_QC_CS-7555
7.
value: 1.00 points
| BioScience Inc. will pay a common stock dividend of $7.10 at the end of the year (D1). The required return on common stock (Ke) is 18 percent. The firm has a constant growth rate (g) of 8 percent. |
| Compute the current price of the stock (P0). (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Current price | $ |
8.
value: 2.00 points
| Justin Cement Company has had the following pattern of earnings per share over the last five years: |
| Year | Earnings Per Share | ||
| 2006 | $ | 8.00 | |
| 2007 | 8.40 | ||
| 2008 | 8.82 | ||
| 2009 | 9.26 | ||
| 2010 | 9.72 | ||
| The earnings per share have grown at a constant rate (on a rounded basis) and will continue to do so in the future. Dividends represent 40 percent of earnings. |
| a. | Project earnings and dividends for the next year (2011). (Round the growth rate to the nearest whole percent. Do not round any other intermediate calculations. Round your answers to 2 decimal places.) |
| 2011 | ||
| Earnings | $ | |
| Dividend | $ | |
| b. | If the required rate of return (Ke) is 13 percent, what is the anticipated stock price (P0) at the beginning of 2011? (Round the growth rate to the nearest whole percent. Do not round any other intermediate calculations. Round your answer to 2 decimal places.) |
| Anticipated stock price | $ |
9.
value: 4.00 points
| Beasley Ball Bearings paid a dividend of $4 last year. The dividend is expected to grow at a constant rate of 3 percent over the next five years. The required rate of return is 12 percent (this will also serve as the discount rate in this problem). Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. |
| a. | Compute the anticipated value of the dividends for the next four years. (Do not round intermediate calculations. Round your final answers to 2 decimal places.) |
| Anticipated Value | |
| D1 | $ |
| D2 | $ |
| D3 | $ |
| D4 | $ |
| b. | Calculate the present value of each of the anticipated dividends at a discount rate of 12 percent. (Do not round intermediate calculations. Round your final answers to 2 decimal places.) |
| PV of Dividends | |
| D1 | $ |
| D2 | |
| D3 | |
| D4 | |
| Total | $ |
| c. | Compute the price of the stock at the end of the fourth year (P4). (Do not round intermediate calculations. Round your final answer to 2 decimal places.) |
| Stock price at Year 4 | $ |
| d. | Calculate the present value of the year 4 stock price at a discount rate of 12 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) |
| Present value of Year 4 stock price | $ |
| e. | Compute the current value of the stock. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) |
| Current value | $ |
| f. | Use the formula given below to show that it will provide approximately the same answer as part e. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) |
| P0 | = | D1 |
| Ke − g |
| Current value | $ |
| g. | If current EPS were equal to $5.15 and the P/E ratio is 1.2 times higher than the industry average of 8, what would the stock price be? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) |
| Stock price | $ |
| h. | By what dollar amount is the stock price in part g different from the stock price in part f? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) |
| Amount | $ |
| i. | In regard to the stock price in part f, indicate which direction it would move if: |
| (1) | D1 increases | |
| (2) | Ke increases | |
| (3) | g increases | |
10.
value: 2.00 points
| Ecology Labs, Inc., will pay a dividend of $7.10 per share in the next 12 months (D1). The required rate of return (Ke) is 18 percent and the constant growth rate is 8 percent. (Each question is independent of the others.) |
| a. | Compute the price of Ecology Labs’ common stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Price | $ |
| b. | Assume Ke, the required rate of return, goes up to 21 percent. what will be the new price? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| New price | $ |
| c. | Assume the growth rate (g) goes up to 11 percent. what will be the new price? Ke goes back to its original value of 18 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| New price | $ |
| d. | Assume D1 is $7.90. what will be the new price? Assume Ke is at its original value of 18 percent and g goes back to its original value of 8 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
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