| Common Stock and Preferred Stock | |||
| PROBLEM 1 | |||
| PREFERRED STOCK VALUATION | |||
| 1) What is the value of the preferred stock when the dividend rate is 14% and the par value is $100? The discount rate is 12%. | |||
| Dividend rate | 14.0% | ||
| Par value | $100.00 | ||
| Discount rate | 12.0% | ||
| Present Value | |||
| PROBLEM 2 | |||
| PREFERRED STOCK VALUATION | |||
| 2) Assume a preferred stock is selling for $33 per share in the market and pays a dividend of $3.60 annually. | |||
| Market price | $33.00 | ||
| Dividend | $3.60 | ||
| a) return | |||
| b) value | |||
| c) invest? | |||
| PROBLEM 3 | |||
| COMMON STOCK VALUATION | |||
| 3) A common stock paid $1.32 in dividends last year and is expected to grow indefinitely at an annual rate of 7%. What is the value of the stock if you require a return of 11%? | |||
| Growth rate | 7.0% | ||
| Dividend | $1.32 | ||
| Required rate | 11.0% | ||
| Value | |||
| PROBLEM 4 | |||
| COMMON STOCK VALUATION | |||
| 4) A common stock paid $1.32 in dividends last year. Dividends are expected to grow at 8% annually indefinitely. | |||
| Dividends last year | $1.32 | ||
| Dividend growth | 8.0% | ||
| Current market price | $23.50 | ||
| a) expected rate of return | |||
| b) required return | 10.50% | ||
| value | |||
| c) invest? | |||
Instructions
1) What is the value of the preferred stock when the dividend rate is 14% and the par value is $100? The discount rate is 12%.
2) Assume a preferred stock is selling for $33 per share in the market and pays a dividend of $3.60 annually.
a) What is the expected rate of return on the stock?
b) If you require a 10% rate of return, what is the value of the stock to you?
c) Would you invest in the stock? Explain.
3) A common stock paid $1.32 in dividends last year and is expected to grow indefinitely at an annual rate of 7%. What is the value of the stock if you require a return of 11%?
4) A common stock paid $1.32 in dividends last year. Dividends are expected to grow at 8% annually indefinitely.
a) If the stock currently sells at $23.50 per share, what is the stock’s expected return?
b) If you require a return of 10.5%, what is the value of the stock for you?
c) Should you make the investment? Explain.
| Bond Valuation and Yield | ||
| A bond has a par value of $1,000, pays $70 semiannually and has a maturity of 15 years. | ||
| 1) If the bond earns 12% per year, what is the price of the bond? | ||
| Rate | ||
| Nper | ||
| PMT | ||
| FV | ||
| Type | ||
| PV | ||
| 2) What is the yield to maturity for the bond? | ||
| Nper | ||
| PMT | ||
| PV | ||
| FV | ||
| Type | ||
| Rate | ||
| 3) What would be the bond’s price if the rate earned declined to 8% per year? | ||
| Rate | ||
| Nper | ||
| PMT | ||
| FV | ||
| Type | ||
| PV | ||
| 4) If the maturity period is reduced to 10 years and the required rate of return is 8%, what would be the price of the bond? | ||
| Rate | ||
| Nper | ||
| PMT | ||
| FV | ||
| Type | ||
| PV | ||
| 5) What is the yield to maturity for the bond when the maturity is 10 years and the required rate of return is 8%? | ||
| Nper | annualized | |
| PMT | ||
| PV | ||
| FV | ||
| Type | ||
| Rate | ||
| 6) What generalizations about bond prices, interest rates, and maturity periods can be made based on the calculations made above? | ||
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