Question

1. A stock sells at $15 per share.
(a) What is the EPS for the company if it has a P/E ratio of 20?
(b) If the company’s dividend yield is 3 percent, what is its dividend per share?
(c) What is the book value of the company if the price-to-book ratio is 1.5 and it has 100,000 shares of stock outstanding?
2. What is the market price of a $1000, 8 percent bond if comparable market interest rates drop to 6 percent and the bond matures in 15 years?
3. What is the market price of a $1000, 8 percent bond if comparable market interest rates rise to 10 percent and the bond matures in 14 years?
4. For a municipal bond paying 3.4 percent for a tax-payer in the 25 percent tax bracket, what is the equivalent taxable yield?
5. For a municipal bond paying 3.7 percent for a taxpayer in the 33 percent tax bracket, what is the equivalent taxable yield?
6. Yield, Price, and YTM. A corporate bond maturing in 15 years with a coupon rate of 9.9 percent was purchased for $980.
(a) What is its current yield?
(b) What will be its selling price in two years if com-parable market interest rates drop 1.9 percentage points?
(c) Calculate the bond’s YTM using Equation (14.6) or the Garman/Forgue companion website.
7. A corporate bond maturing in 20 years with a coupon rate of 8.2 percent was purchased for $1100.
(a) What is its current yield?
(b) What will the bond’s selling price be if comparable market interest rates rise 1.8 percentage points in two years?
(c) Calculate the bond’s YTM using Equation (14.6) or the Garman/Forgue companion website.
8. Michael Margolis is a single parent and motivational training consultant from Reno, Arizona. He is wondering about potential returns on investments given certain amounts of risk. Michael invested a total of $6000 in three stocks ($2000 in each) with different betas: stock A with a beta of 0.8, stock B with a beta of 1.7, and stock C with a beta of 2.5.
(a) If the stock market rises 7 percent over the next year, what will be the likely value of each investment?
(b) If the stock market declines 8 percent over the next year, what will be the likely value of each of Michael’s investments?
9. Xiao and Shiao Jing-jian, newlyweds from Rockville, Maryland, have decided to begin investing for the future. Xiao is a 7-Eleven store manager, and Shiao is a high-school math teacher. The couple intends to take $3000 out of their savings for investment purposes and then continue to invest an additional $200 to $400 per month. Both have a moderate investment philosophy and seek some cash dividends as well as price appreciation.
Calculate the five-year return on the investment choices in the table below. Put your calculations in tabular form like that shown in Table.
(When making your calculations you should assume at the end of the first year. At the end of the first year the EPS for Running Paws will be $2.40 with a dividend of $0.66, and the EPS for Eagle Packaging will be $2.76 with a projected dividend of $0.86.)
(a) Using the appropriate P/E ratios, what are the estimated market prices of the Running Paws and Eagle Packaging stocks after five years?
(b) Show your calculations in determining the projected price appreciations for the two stocks over the five years.
(c) Add the projected price appreciation of each stock to its projected cash dividends, and show the total five-year percentage returns for the two stocks.
(d) Determine the average annual dividend for each stock, and use these figures in calculating the approximate compound yields for each.
(e) Assume that the beta is 2.5 for Running Paws and 2.8 for Eagle Packaging. If the market went up 20 percent during the year, what would be the likely stock prices for Running Paws and Eagle Packaging?
(f) Assume that inflation is approximately 4 percent and the return on high-quality, long-term corporate bonds are 8 percent. Given the Jing-jians’investment philosophy, explain why you would recommend (1) Running Paws, (2) Eagle Packaging, or (3) a high-quality, long-term corporate bond as a growth investment. Support your answer by calculating the potential rate of return using the information on pages 421–424 to; or by using the Garman/Forgue website. The Jing-jians are in the 25 percent marginal taxbracket.


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  • CreatedNovember 26, 2014
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