Seminar 2 T2 Questions PDF

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Seminar questions about shares and bond valuation...

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Seminar 02: Share and Bond Valuation 1. Argaiv Towers has outstanding an issue of preferred stock with a par value of £100. It pays an annual dividend equal to 8 percent of par value. If the required return on Argaiv preferred stock is 6 six percent, and if Argaiv pays its next dividend in one year, what is the market price of the preferred stock today? 2.

The last dividend paid by Coppard Inc. was £1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?

3. Propulsion Sciences’ (PS) stock dividend has grown at 10 percent per year for as long as anyone can remember. Investors believe that a year from now the company will pay a dividend of £3 and that dividends will continue their 10 percent growth indefinitely. If the market’s required return on PS stock is 12 percent, what does the stock sell for today, and how much will it sell for a year from today after the stockholders receive their dividend? 4. Investors believe that a certain stock will pay a £4 dividend next year. The market price of the stock is £66.67, and investors expect a 12 percent return on the stock. What is long-run growth rate in dividends consistent with the current price of the stock? 5. Gail Dribble is analyzing the shares of Petscan Radiology. Petscan’s stock pays a dividend once each year, and it just distributed this year’s £0.85 dividend. The market price of the stock is £12.14. Gail estimates that Petscan will increase it dividends by 7 percent per year forever. After contemplating the risk of Petscan stock, Gail believes that she would be willing to hold the stock only if it provided an annual expected return of at least 13 percent. Should she buy Petscan shares or not? 6. Morven plc has a share price today of £20.00 and this is expected to grow to £20.80 by the end of the year following the payment of a dividend of £1.60. Determine the company’s expected dividend yield and its expected capital gain yield. What rate of return is expected on the company’s shares over the next year? 7. Sawchuck Consulting has been profitable for the last 5 years, but it has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Assuming a required return of 11.00%, what is your estimate of the stock's current value? 8. Calculate the price of a five-year, £1,000 par value bond that makes semiannual payments, has a coupon rate of eight percent, and offers a yield to maturity of seven percent. Recalculate the price assuming a nine percent YTM. What general relationship does this problem illustrate?

9. Griswold Travel Inc. has issued six-year bonds that pay £30 in interest twice each year. The par value of these bonds is £1,000 and they offer a yield to maturity of 5.5 percent. How much are the bonds worth? 10. Bennifer Jewelers recently issued ten-year bonds that make annual interest payments of £50. Suppose you purchased one of these bonds at par value when it was issued. Right away market interest rates jumped, and the YTM on your bond rose to six percent. What happened to the price of your bonds? 11. What is the price of a coupon bond that has 5 years to maturity, which pays out a coupon of 4% per year and has a par value of £100. Assume that the expected yield to maturity of this type of bond is 6%. Is this bond selling at a premium or discount? 12. Brymo Ltd issued bonds two years ago that pay interest on an annual basis at 8%. The bonds are due for repayment in two years’ time. They will be redeemed at £110 per £100 nominal value. A yield of 10% is required by investors for such bonds. What is the expected market value?...