Description
Complete the following problems from Chapters 6 and 7 in Principles of Managerial Finance:
- Bond Valuation: P6-13; P6-17; P6-18; P6-19; P6-22
- Stock Valuation: P7-6; P7-8; P7-9; P7-14; P7-15; P7-16
Use the Chapters 6-7 Excel resource (if needed) to complete the problem-set assignment in this topic.
Please show all work for each problem. I have a Spreadsheet I will attach.
LG 5
Bond value and changing required returns Midland Utilities has outstanding a bond
issue that will mature to its $1,000 par value in 12 years. The bond has
The bond has a coupon
interest rate of 11% and pays interest annually.
a. Find the value of the bond if the required return is (1) 11%, (2) 15%, and
(3) 8%.
b. Plot your findings in part a on a set of “required return (x axis)-market value of
bond (y axis)” axes.
c. Use your findings in parts a and b to discuss the relationship between the coupon
interest rate on a bond and the required return and the market value of the bond
relative to its par value.
d. What two possible reasons could cause the required return to differ from the
coupon interest rate?
LG 5
P6-18 Bond value and time: Constant required returns Pecos Manufacturing has just is-
sued a 15-year, 12% coupon interest rate, $1,000-par bond that pays interest annu-
ally. The required return is currently 14%, and the company is certain it will remain
at 14% until the bond matures in 15 years. .
a. Assuming that the required return does remain at 14% until maturity, find the
value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3
years, and (6) 1 year to maturity.
b. Plot your findings on a set of “time to maturity (x axis)-market value of bond
(y axis)” axes constructed similarly to Figure 6.5 on page 252.
c. All else remaining the same, when the required return differs from the coupon
interest rate and is assumed to be constant to maturity, what happens to the
bond value as time moves toward maturity? Explain in light of the graph in
part b.
Personal Finance Problem
LG G P6-19 Bond value and time: Changing required returns Lynn Parsons is considering invest-
ing in either of two outstanding bonds. The bonds both have $1,000 par values and
11% coupon interest rates and pay annual interest. Bond A has exactly 5 years to
maturity, and bond B has 15 years to maturity.
a. Calculate the value of bond A if the required return is (1) 8%, (2) 11%, and
(3) 14%.
b. Calculate the value of bond B if the required return is (1) 8%, (2) 11%, and
(3) 14%.
es of Managerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J. Zutter. Published by Prentice Hall. Copyright © 2015 by Pearson Education, Inc.
CHAPTER 6 Interest Rates and Bond Valuation
267
c. From your findings in parts a and b, complete the following table, and discuss
the relationship between time to maturity and changing required returns.
Value of bond A
Value of bond B
?
2
Required return
8%
11
14
?
2
d. If Lynn wanted to minimize interest rate risk, which bond should she purchase?
Why?
313
(314 of 931)
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©
+
75%
C
9 9
7
D
7
9
E
12
10
P6-21 Yield to maturity The Salem Company bond currently sells for $955, has a 12%
coupon interest rate and a $1,000 par value, pays interest annually, and has 15
ye:
to maturity.
a. Calculate the yield to maturity (YTM) on this bond.
b. Explain the relationship that exists between the coupon interest rate and yield to
maturity and the par value and market value of a bond.
6
P6-22 Yield to maturity Each of the bonds shown in the following table pays interest annually
Bond
Par value
Coupon interest rate
Years to maturity
Current value
A
9%
8
$ 820
B
12
16
C
$1,000
1,000
500
1,000
1,000
12
1,000
560
1,120
D
15
10
E
5
3
900
a. Calculate the yield to maturity (YTM) for each bond.
b. What relationship exists between the coupon interest rate and yield to maturity
and the par value and market value of a bond? Explain.
Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J. Zutter. Published by Prentice Hall. Copyright © 2015 by Pearson Education, In
PART 3 Valuation of Securities
LG 5 P6-23
Personal Finance Problem
Bond valuation and yield to maturity Mark Goldsmith’s broker has shown him two
per share
Stock Value: Lero growth Kelsey Drums, Inc., is a well-established
supplier of fine percussion instruments to orchestras all over the United States.
The company’s class A common stock has paid a dividend of $5.00
per
year for the last 15 years. Management expects to continue to pay at that amount
for the foreseeable future. Sally Talbot purchased 100 shares of Kelsey class A
common 10 years ago at a time when the required rate of return for the stock was
16%. She wants to sell her shares today. The current required rate of return for the
stock is 12%. How much capital gain or loss will Sally have on her shares?
P7-7 Preferred stock valuation Jones Design wishes to estimate the value of its outstand-
ing preferred stock. The preferred issue has an $80 par value and pays an annual
dividend of $6.40 per share. Similar-risk preferred stocks are currently earning a
9.3% annual rate of return.
a. What is the market value of the outstanding preferred stock?
b. If an investor purchases the preferred stock at the value calculated in part a, how
much does she gain or lose per share if she sells the stock when the required re-
turn on similar-risk preferred stocks has risen to 10.5%? Explain.
ce, Fourteenth Edition, by Lawrence J. Gitman and Chad J. Zutter. Published by Prentice Hall. Copyright © 2015 by Pearson Education, Inc.
RT 3 Valuation of Securities
4
P7-8
Common stock value: Constant growth Use the constant-growth model (Gordon
growth model) to find the value of each firm shown in the following table.
Firm
Dividend expected next year
Dividend growth rate
Required return
A
8%
$1.20
4.00
13%
15
B
5
0.65
10
14
6.00
8
D
E
9
20
2.25
8
G 4
P7-9 Common stock value: Constant growth McCracken Roofing, Inc., common stock
paid a dividend of $1.20 per share last year. The company expects earnings and divi-
dends to grow at a rate of 5% per year for the foreseeable future.
a. What required rate of return for this stock would result in a price per share of $28?
b. If McCracken expects both earnings and dividends to grow at an annual rate of
10%, what required rate of return would result in a price per share of $28?
es_of… X
>
351
(352 of 931)
)
+
75%
LG 4
P7-14 Common stock value: Variable growth Lawrence Industries’ most recent annual
dividend was $1.80 per share (Do = $1.80), and the firm’s required return is 11%.
Find the market value of Lawrence’s shares when:
a. Dividends are expected to grow at 8% annually for 3 years, followed by a 5%
constant annual growth rate in years 4 to infinity.
b. Dividends are expected to grow at 8% annually for 3 years, followed by a 0%
constant annual growth rate in years 4 to infinity.
c. Dividends are expected to grow at 8% annually for 3 years, followed by a 10%
constant annual growth rate in years 4 to infinity.
Personal Finance Problem
LG 4 P7-15 Common stock value: All growth models You are evaluating the potential purchase
of a small business currently generating $42,500 of after-tax cash flow
(Do = $42,500). On the basis of a review of similar-risk investment opportunities,
you must earn an 18% rate of return on the proposed purchase. Because you are rel-
atively uncertain about future cash flows, you decide to estimate the firm’s value us-
ing several possible assumptions about the growth rate of cash flows.
a. What is the firm’s value if cash flows are expected to grow at an annual rate of
0% from now to infinity?
b. What is the firm’s value if cash flows are expected to grow at a constant annual
rate of 7% from now to infinity?
c. What is the firm’s value if cash flows are expected to grow at an annual rate of
12% for the first 2 years, followed by a constant annual rate of 7% from
to infinity?
year 3
LG 5
P7-16 Free cash flow valuation Nabor Industries is considering going public but is unsure
of a fair offering price for the company. Before hiring an investment banker to assist
in making the public offering, managers at Nabor have decided to make their own
estimate of the firm’s common stock value. The firm’s CFO has gathered data for
performing the valuation using the free cash flow valuation model.
anagerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J. Zutter. Published by Prentice Hall. Copyright © 2015 by Pearson Education, Inc.
352 (353 of 931)
M
s+
75%
了在
to inrinity?
G 5
P7-16 Free cash flow valuation Nabor Industries is considering going public but is unsure
of a fair offering price for the company. Before hiring an investment banker to assist
in making the public offering, managers at Nabor have decided to make their own
estimate of the firm’s common stock value. The firm’s CFO has gathered data for
performing the valuation using the free cash flow valuation model.
al Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J. Zutter. Published by Prentice Hall. Copyright © 2015 by Pearson Education, In
PART 3 Valuation of Securities
The firm’s weighted average cost of capital is 11%, and it has $1,500,000 of debt
at market value and $400,000 of preferred stock at its assumed market value. The es-
timated free cash flows over the next 5 years, 2016 through 2020, are given below.
Beyond 2020 to infinity, the firm expects its free cash flow to grow by 3% annually.
Year (t)
2016
2017
Free cash flow (FCF:)
$200,000
250,000
310,000
350,000
390,000
2018
2019
2020
a. Estimate the value of Nabor Industries’ entire company by using the free cash
flow valuation model.
b. Use your finding in part a, along with the data provided above, to find Nabor In-
dustries’ common stock value.
c. If the firm plans to issue 200,000 shares of common stock, what is its estimated
value per share?
Purchase answer to see full
attachment
Bond value and changing required returns Midland Utilities has outstanding a bond
issue that will mature to its $1,000 par value in 12 years. The bond has
The bond has a coupon
interest rate of 11% and pays interest annually.
a. Find the value of the bond if the required return is (1) 11%, (2) 15%, and
(3) 8%.
b. Plot your findings in part a on a set of “required return (x axis)-market value of
bond (y axis)” axes.
c. Use your findings in parts a and b to discuss the relationship between the coupon
interest rate on a bond and the required return and the market value of the bond
relative to its par value.
d. What two possible reasons could cause the required return to differ from the
coupon interest rate?
LG 5
P6-18 Bond value and time: Constant required returns Pecos Manufacturing has just is-
sued a 15-year, 12% coupon interest rate, $1,000-par bond that pays interest annu-
ally. The required return is currently 14%, and the company is certain it will remain
at 14% until the bond matures in 15 years. .
a. Assuming that the required return does remain at 14% until maturity, find the
value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3
years, and (6) 1 year to maturity.
b. Plot your findings on a set of “time to maturity (x axis)-market value of bond
(y axis)” axes constructed similarly to Figure 6.5 on page 252.
c. All else remaining the same, when the required return differs from the coupon
interest rate and is assumed to be constant to maturity, what happens to the
bond value as time moves toward maturity? Explain in light of the graph in
part b.
Personal Finance Problem
LG G P6-19 Bond value and time: Changing required returns Lynn Parsons is considering invest-
ing in either of two outstanding bonds. The bonds both have $1,000 par values and
11% coupon interest rates and pay annual interest. Bond A has exactly 5 years to
maturity, and bond B has 15 years to maturity.
a. Calculate the value of bond A if the required return is (1) 8%, (2) 11%, and
(3) 14%.
b. Calculate the value of bond B if the required return is (1) 8%, (2) 11%, and
(3) 14%.
es of Managerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J. Zutter. Published by Prentice Hall. Copyright © 2015 by Pearson Education, Inc.
CHAPTER 6 Interest Rates and Bond Valuation
267
c. From your findings in parts a and b, complete the following table, and discuss
the relationship between time to maturity and changing required returns.
Value of bond A
Value of bond B
?
2
Required return
8%
11
14
?
2
d. If Lynn wanted to minimize interest rate risk, which bond should she purchase?
Why?
313
(314 of 931)
M
©
+
75%
C
9 9
7
D
7
9
E
12
10
P6-21 Yield to maturity The Salem Company bond currently sells for $955, has a 12%
coupon interest rate and a $1,000 par value, pays interest annually, and has 15
ye:
to maturity.
a. Calculate the yield to maturity (YTM) on this bond.
b. Explain the relationship that exists between the coupon interest rate and yield to
maturity and the par value and market value of a bond.
6
P6-22 Yield to maturity Each of the bonds shown in the following table pays interest annually
Bond
Par value
Coupon interest rate
Years to maturity
Current value
A
9%
8
$ 820
B
12
16
C
$1,000
1,000
500
1,000
1,000
12
1,000
560
1,120
D
15
10
E
5
3
900
a. Calculate the yield to maturity (YTM) for each bond.
b. What relationship exists between the coupon interest rate and yield to maturity
and the par value and market value of a bond? Explain.
Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J. Zutter. Published by Prentice Hall. Copyright © 2015 by Pearson Education, In
PART 3 Valuation of Securities
LG 5 P6-23
Personal Finance Problem
Bond valuation and yield to maturity Mark Goldsmith’s broker has shown him two
per share
Stock Value: Lero growth Kelsey Drums, Inc., is a well-established
supplier of fine percussion instruments to orchestras all over the United States.
The company’s class A common stock has paid a dividend of $5.00
per
year for the last 15 years. Management expects to continue to pay at that amount
for the foreseeable future. Sally Talbot purchased 100 shares of Kelsey class A
common 10 years ago at a time when the required rate of return for the stock was
16%. She wants to sell her shares today. The current required rate of return for the
stock is 12%. How much capital gain or loss will Sally have on her shares?
P7-7 Preferred stock valuation Jones Design wishes to estimate the value of its outstand-
ing preferred stock. The preferred issue has an $80 par value and pays an annual
dividend of $6.40 per share. Similar-risk preferred stocks are currently earning a
9.3% annual rate of return.
a. What is the market value of the outstanding preferred stock?
b. If an investor purchases the preferred stock at the value calculated in part a, how
much does she gain or lose per share if she sells the stock when the required re-
turn on similar-risk preferred stocks has risen to 10.5%? Explain.
ce, Fourteenth Edition, by Lawrence J. Gitman and Chad J. Zutter. Published by Prentice Hall. Copyright © 2015 by Pearson Education, Inc.
RT 3 Valuation of Securities
4
P7-8
Common stock value: Constant growth Use the constant-growth model (Gordon
growth model) to find the value of each firm shown in the following table.
Firm
Dividend expected next year
Dividend growth rate
Required return
A
8%
$1.20
4.00
13%
15
B
5
0.65
10
14
6.00
8
D
E
9
20
2.25
8
G 4
P7-9 Common stock value: Constant growth McCracken Roofing, Inc., common stock
paid a dividend of $1.20 per share last year. The company expects earnings and divi-
dends to grow at a rate of 5% per year for the foreseeable future.
a. What required rate of return for this stock would result in a price per share of $28?
b. If McCracken expects both earnings and dividends to grow at an annual rate of
10%, what required rate of return would result in a price per share of $28?
es_of… X
>
351
(352 of 931)
)
+
75%
LG 4
P7-14 Common stock value: Variable growth Lawrence Industries’ most recent annual
dividend was $1.80 per share (Do = $1.80), and the firm’s required return is 11%.
Find the market value of Lawrence’s shares when:
a. Dividends are expected to grow at 8% annually for 3 years, followed by a 5%
constant annual growth rate in years 4 to infinity.
b. Dividends are expected to grow at 8% annually for 3 years, followed by a 0%
constant annual growth rate in years 4 to infinity.
c. Dividends are expected to grow at 8% annually for 3 years, followed by a 10%
constant annual growth rate in years 4 to infinity.
Personal Finance Problem
LG 4 P7-15 Common stock value: All growth models You are evaluating the potential purchase
of a small business currently generating $42,500 of after-tax cash flow
(Do = $42,500). On the basis of a review of similar-risk investment opportunities,
you must earn an 18% rate of return on the proposed purchase. Because you are rel-
atively uncertain about future cash flows, you decide to estimate the firm’s value us-
ing several possible assumptions about the growth rate of cash flows.
a. What is the firm’s value if cash flows are expected to grow at an annual rate of
0% from now to infinity?
b. What is the firm’s value if cash flows are expected to grow at a constant annual
rate of 7% from now to infinity?
c. What is the firm’s value if cash flows are expected to grow at an annual rate of
12% for the first 2 years, followed by a constant annual rate of 7% from
to infinity?
year 3
LG 5
P7-16 Free cash flow valuation Nabor Industries is considering going public but is unsure
of a fair offering price for the company. Before hiring an investment banker to assist
in making the public offering, managers at Nabor have decided to make their own
estimate of the firm’s common stock value. The firm’s CFO has gathered data for
performing the valuation using the free cash flow valuation model.
anagerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J. Zutter. Published by Prentice Hall. Copyright © 2015 by Pearson Education, Inc.
352 (353 of 931)
M
s+
75%
了在
to inrinity?
G 5
P7-16 Free cash flow valuation Nabor Industries is considering going public but is unsure
of a fair offering price for the company. Before hiring an investment banker to assist
in making the public offering, managers at Nabor have decided to make their own
estimate of the firm’s common stock value. The firm’s CFO has gathered data for
performing the valuation using the free cash flow valuation model.
al Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J. Zutter. Published by Prentice Hall. Copyright © 2015 by Pearson Education, In
PART 3 Valuation of Securities
The firm’s weighted average cost of capital is 11%, and it has $1,500,000 of debt
at market value and $400,000 of preferred stock at its assumed market value. The es-
timated free cash flows over the next 5 years, 2016 through 2020, are given below.
Beyond 2020 to infinity, the firm expects its free cash flow to grow by 3% annually.
Year (t)
2016
2017
Free cash flow (FCF:)
$200,000
250,000
310,000
350,000
390,000
2018
2019
2020
a. Estimate the value of Nabor Industries’ entire company by using the free cash
flow valuation model.
b. Use your finding in part a, along with the data provided above, to find Nabor In-
dustries’ common stock value.
c. If the firm plans to issue 200,000 shares of common stock, what is its estimated
value per share?
Purchase answer to see full
attachment
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