Chapter 4: 19BP (page 324)
Stilley Resources bonds have four years left to maturity. Interest is paid annually, and the bonds have a \(1,000 par value and a coupon rate of 5 percent. If the price of the bond is \)841.51, what is the yield to maturity?
The bond’s yield to maturity is determined as the 9.73%
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What is the present value of
b. $16,600 in 5 years at 9 percent?
Question:Beasley Ball Bearings paid a \(4 dividend last year. The dividend is expected to grow at a constant rate of 2 percent over the next four years. The required rate of return is 15 percent (this will also serve as the discount rate in this problem). Round all values to three places to the right of the decimal point where appropriate.
a. Compute the anticipated value of the dividends for the next four years. That is, compute D1, D2, D3, and D4; for example, D1 is \)4.08 (\(4 3 1.02).
b. Discount each of these dividends back to present at a discount rate of 15 percent and then sum them.
c. Compute the price of the stock at the end of the fourth year (P4). P4 5 D5 ______ Ke 2 g (D5 is equal to D4 times 1.02.)
d. After you have computed P4, discount it back to the present at a discount rate of 15 percent for four years.
e. Add together the answers in part b and part d to get P0, the current value of the stock. This answer represents the present value of the four periods ofdividends, plus the present value of the price of the stock after four periods (which in turn represents the value of all future dividends).
f. Use Formula 10-8 to show that it will provide approximately the same answer as part e. P0 5 D1 ______ Ke 2 g For Formula 10-8, use D1 5 \)4.08, Ke 5 15 percent, and g 5 2 percent. (The slight difference between the answers to part e and part f is due to rounding.)
g. If current EPS were equal to $4.98 and the P/E ratio is 1.2 times higher than the industry average of 6, what would the stock price be?
h. By what dollar amount is the stock price in part g different from the stock price in part f?
i. In regard to the stock price in part f, indicate which direction it would move if (1) D1 increases, (2) Ke increases, and (3) g increases
Question: Morgan Jennings, a geography professor, invests $50,000 in a parcel of land that is expected to increase in value by 12 percent per year for the next five years. He will take the proceeds and provide himself with a 10-year annuity. Assuming a 12 percent interest rate, how much will this annuity be?
Question: As stated in the chapter, annuity payments are assumed to come at the end of each payment period (termed an ordinary annuity). However, an exception occurs when the annuity payments come at the beginning of each period (termed an annuity due). To find the present value of an annuity due, the annuity formula must be adjusted as to the following: PVAD 5 A 3 ( 12 1 ________ (11i) n 21 ___________ i 11) The Capital Budgeting Process blo7716x_ch09_255-294.indd 284. Likewise, the formula for the future value of an annuity due requires a modification: FVAD 5 A 3 ( (11i) n11 21 ___________ i 21). What is the future value of a 15-year annuity of $1,800 per period where payments come at the beginning of each period? The interest rate is 12 percent.
If inflationary expectations increase, what is likely to happen to the yield to maturity on bonds in the marketplace? What is also likely to happen to the price of bonds?
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