BASIC VALUATION

1) Basic bond valuation. Steck Industries has an outstandin issue o! "1#$$$ %ar value
bonds &ith a 1'( cou%on interest rate. The issue %a)s interest annually and has 1*
)ears re+ainin to its +aturit) date.
1) I! bonds o! si+ilar risk are currentl) earnin a 1$( rate o! return# ho& +uch should
the Steck Industries bond sell !or toda),
c. I! the re-uired return &ere at 1'( instead o! 1$(# &hat &ould the current value o!
Steck.s Bonds be,
') Calculate the value o! each o! the bonds sho&n in the !ollo&in table# all o! &hich
%a) interest annuall).
Bond /ar value Cou%on interest rate 0ears to +aturit) 1e-uired return
A "1$$$ 12( '$ 1'(
B "1$$$ 3( 1* 3(
C "1$$ 1$( 3 14(
5 "6$$ 1*( 14 13(
7 "1$$$ 1'( 1$ 1$(
4) Culbert National has outstandin a bond issue that &ill +ature to its "1#$$$ %ar value
in 1' )ears. The bond has a cou%on interest rate o! 11( and %a)s interest annually.
a. 8ind the value o! the bond i! the re-uired return in 91) 11(# 9') 16(# and 94) 3(.
2) Bond value and ti+e : Constant re-uired return. 1ost ;anu!cturin has <ust issued at
16 )ears# 1'( cou%on interest rate# "1#$$$ %ar bond that %a)s interest annually. The
re-uired return is currentl) 12( until the bond +atures in 16 )ears.
a. Assu+in that the re-uired return does re+ain at 12( until +aturit)# !ind the value o!
the bond &ith 91) 16 )ears# 9') 1' )ears# 94) = )ears# 92) * )ears# 96) 4 )ears# 9*) 1
)ears to +aturit).
6) Bond value and ti+e : Chanin re-uired returns. /at L)nn is considerin investin
in either o! t&o outstandin bonds. The bonds both have "1#$$$ %ar values and 11(
cou%on interest rates and %a) annual interest. Bond A has e>actl) 6 )ears to +aturit)#
and bond B has 16 )ears to +aturit).
a. Calculate the value o! bond A i! the re-uired return is 91) 3(# 9') 11(# and 94) 12(.
b. Calculate the value o! bond B i! the re-uired return is 91) 3(# 9') 11(# and 94) 12(.

*) 7ach o! the bonds sho&n in the !ollo&in table %a)s interest annuall).
Bond /ar value Cou%on interest rate 0ears to +aturit) Current value
A "1$$$ =( 3 "3'$
B "1$$$ 1'( 1* "1$$$
C "6$$ 1'( 1' "6*$
5 "1$$$ 16( 1$ "11'$
7 "1$$$ 6( 4 "=$$
a. Calculate the )ield to +aturit) 90T;) !or each bond.
?) Bond valuation : Se+iannual interest. Calculate the value o! each o! the bonds
sho&n in the !ollo&in table# all o! &hich %a) interest se+iannuall).
Bond /ar value Cou%on interest rate 0ears to +aturit) 1e-uired return
A "1$$$ 1$( 1' 3(
B "1$$$ 1'( '$ 1'(
C "6$$ 1'( 6 12(
5 "1$$$ 12( 1$ 1$(
7 "1$$ *( 2 12(
3) 7nter%rises is a +ature !ir+ in the +achine tool co+%onent industr). The !ir+.s
+ost recent ca++on stock dividend &as "'.2$ %er share. Because o! its +aturit) as &ell
as its stable sales and earnins# the !ir+.s +anae+ent !eels that dividends &ill re+ain
at the current level !or the !oreseeable !uture.
a. I! the re-uired return is 1'(# &hat &ill be the value o! Connect 7nter%rises. co++on
stock,
b. I! the !ir+.s risk as %erceived b) +arket %artici%ants suddenl) increases# causin the
re-uired return to rise to '$(# &hat &ill be the co++on stock value,
=) @atlo% Sta+%in &ishes to esti+ate the value o! its outstandin %re!erred stock. The
%re!erred issue has an "3$ %ar value and %a)s an annual dividend o! "*.2$ %er share. Si+ilarA
risk %re!erred stocks are currentl) earnin a =.4( annual rate o! return.
a. Bhat is the +arket value o! the outstandin %re!erred stock,
b. I! an investor %urchases the %re!erred stock at the value calculated in %art a# ho& +uch
does she ain or lose %er share i! she sells the stock &hen the re-uired return on si+ilarA
risk %re!erred has risen to 1$.6(, 7>%lain.
1$) Constant ro&th +odel. Use the constant ro&th +odel 9Cordon +odel) to !ind the
value o! each !ir+ in the !ollo&in table.
8ir+ 5ividend e>%ected
ne>t )ear
5ividend ro&th
rate
1e-uired return
A "1.'$ 3( 14(
B "2.$$ 6( 16(
C "$.*6 1$( 12(
5 "*.$$ 3( =(
7 "'.'6 3( '$(
11) La!a)ette Boiler Co+%an) has %aid the dividends sho&n in the !ollo&in table over the
%ast * )ears.
0ear 5ividend %er share
'$$1 "'.3?
'$$$ "'.?*
1=== "'.*$
1==3 "'.2*
1==? "'.4?
1==* "'.'6
The !ir+.s dividend %er share ne>t )ear is e>%ected to be "4.$'.
a. I! )ou can earn 14( on si+ilarArisk invest+ents# &hat is the +ost )ou &ould be
&illin to %a) %er share !or this !ir+,
b. I! )ou can earn onl) 1$( on si+ilarArisk invest+ents# &hat is the +ost )ou &ould
&illin to %a) %er share,
1') 8lorence Industries. +ost recent annual dividend &as "1.3$ %er share 95$ D "1.3$)# and
the !ir+.s re-uired return is 11(. 8ind the +arket value o! 8lorence.s shares &hen E
a. 5ividends are e>%ected to ro& at 3( annuall) !or 4 )ears# !ollo&ed b) a 6( constant
annual ro&th rate in )ears 2 to in!init).
b. 5ividends are e>%ected to ro& at 3( annuall) !or 4 )ears# !ollo&ed b) a $( constant
annual ro&th rate in )ears 2 to in!init).
c. 5ividends are e>%ected to ro& at 3( annuall) !or 4 )ears# !ollo&ed b) a 1$( constant
annual ro&th rate in )ears 2 to in!init).
14) 0ou are evaluatin the %otential %urchase o! a s+all business currentl) eneratin
"2'#6$$ o! a!terAta> cash !lo& 95$ D "2'#6$$). On the basis o! a revie& o! si+ilarArisk
invest+ent o%%ortunities# )ou +ust earn an 13( rate o! return on the %ro%osed %urchase.
Because )ou are relativel) uncertain about !uture cash !lo&# )ou decide to esti+ate the
!ir+.s value usin several %ossible assu+%tions about the ro&th rate o! cash !lo&s.
a. Bhat is the !ir+.s value i! cash !lo&s are e>%ected to ro& at an annual rate o! $(
!ro+ no& to in!init),
b. Bhat is the !ir+.s value i! cash !lo&s are e>%ected to ro& at a constant annual rate
o! ?( !ro+ no& to in!init),
12) FeGak 7nter%rises. +ost recent dividend &as "4 %er share# its e>%ected annual rate o!
dividend ro&th is 6(# and the re-uired return is no& 16(. A variet) o! %ro%osals are
bein considered b) +anae+ent to redirect the !ir+.s activities. 5eter+ine the i+%act
on share %rice !or each o! the !ollo&in %ro%osed actions# and indicate the best
alternative.
a. 5o nothin# &hich &ill leave the ke) !inancial variables unchaned.
b. Invest in a ne& +achine that &ill increases the dividend ro&th rate to *( and lo&er
the re-uired return to 2(.
c. 7li+inates an un%ro!itable %roduct line# &hich &ill increases the dividend ro&th rate
to ?( and raise the re-uired return to 1?(.
d. ;ere &ith another !ir+# &hich &ill reduce the ro&th rate to 2( and raise the
re-uired return to 1*(.
e. Ac-uired a subsidiar) o%eration !ro+ another +anu!acturer. The ac-uisition should
increases the dividend ro&th rate to 3( and increase the re-uired return to 1?(.
16) Civen the !ollo&in in!or+ation !or the stock o! 5eeter Co+%an)# calculate its beta.
Current %rice %er share o! co++on "6$.$$
7>%ected dividend %er share ne>t )ear "4.$$
Constant annual dividend ro&th rate =(
1iskA!ree rate o! return ?(
1eturn on +arket %ort!olio 1$(
1*) Fa%an Steel Co+%an) &ishes to deter+ine the value o! 5el ;ar 8oundr)# a !ir+ that it is
considerin ac-uirin !or cash. Fa%an &ishes to use the ca%ital assets %ricin +odel
9CA/;) to deter+ine the a%%licable discount rate to use as an in%ut to the constantA
ro&th valuation +odel. 5el ;ar.s Stock is not %ublicl) traded. A!ter stud)in the betas
o! !ir+s si+ilar to 5el ;ar that are %ublicl) traded# Fa%an believes that an a%%ro%riate
beta !or 5el ;ar.s stock &ould be 1.'6. The riskA!ree rate is currentl) =(# and the
+arket return is 14(. 5el ;ar.s historical dividend %er share !or each o! the %ast * )ears
is sho&n in the !ollo&in table.
0ears 5ividend %er share
'$$1 "4.22
'$$$ "4.'3
1=== "4.16
1==3 "'.=$
1==? "'.?6
1==* "'.26
a. Civen that 5el ;ar is e>%ected to %a) a dividend o! "4.*3 ne>t )ear# deter+ine the
+a>i+u+ cash %rice that Fa%an should %a) !or each share o! 5el ;ar.
b. 5iscuss the use o! the CA/; !or esti+atin the value o! co++on stock# and describe
the e!!ect on the resultin value o! 5el ;ar o! E
91) A decrease in its dividend ro&th rate '( !ro+ that e>hibited over the 1==* :
'$$1 %eriod.
9') A decrease in its beta to 1.