Understanding financial statements 9th Edition Lyn M. Fraser, Aileen Ormiston - Solutions

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BA Corp is issuing a 10-year bond with a coupon rate of 8 percent. The interest rate for similar bonds is currently 6 percent. Assuming annual payments, what is the value of the bond?
Pierre Dupont just received a cash gift from his grandfather. He plans to invest in a five-year bond issued by Venice Corp. that pays an annual coupon of 5.5 percent. If the current market rate is 7.25 percent, what is the maximum amount Pierre should be willing to pay for this bond?
Knight, Inc., has issued a three-year bond that pays a coupon of 6.10 percent. Coupon payments are made semiannually. Given the market rate of interest of5.80 percent, what is the market value of the bond?
Bond price: Regatta Inc. has seven-year bonds outstanding that pay a 12 percent coupon rate. Investors buying these bonds today can expect to earn a yield to maturity of 8.875 percent. What is the current value of these bonds? Assume annual coupon payments.
You are interested in investing in a five-year bond that pays a 7.8 percent coupon with interest to be received semiannually. Your required rate of return is 8.4 percent. What is the most you would be willing to pay for this bond?
Diane Carter is interested in buying a five-year zero coupon bond with a face value of $1,000. She understands that the market interest rate for similar investments is 9 percent. Assume annual coupon payments. What is the current value of this bond?
Zero coupon bonds: Ten-year zero coupon bonds issued by the U.S. Treasury have a face value of $1,000 and interest is compounded semiannually. If similar bonds in the market yield 10.5 percent, what is the value of these bonds?
Northrop Real Estate Company is planning to fund a development project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual compounding, what will be the price of these bonds if the appropriate discount rate is 14 percent?
Ruth Hornsby is looking to invest in a three-year bond that makes semiannual coupon payments at a rate of 5.875 percent. If these bonds have a market price of $981.13, what yield to maturity and effective annual yield can she expect to earn?
Rudy Sandberg wants to invest in four-year bonds that are currently priced at $868.43. These bonds have a coupon rate of 6 percent and make semiannual coupon payments. What is the current market yield on this bond?
Josh Kavern bought 10-year, 12 percent coupon bonds issued by the U.S. Treasury three years ago at $913.44. If he sells these bonds, for which he paid the face value of $1,000, at the current price of $804.59, what is his realized yield on the bonds? Assume similar coupon-paying bonds make annual
Four years ago, Lisa Stills bought six-year, 5.5 percent coupon bonds issued by the Fairways Corp. for $947.68. If she sells these bonds at the current price of $894.52, what will be her realized yield on the bonds? Assume similar coupon-paying bonds make annual coupon payments.
The International Publishing Group is raising $10 million by issuing 15-year bonds with a coupon rate of 8.5 percent. Coupon payments will be made annually. Investors buying the bonds today will earn a yield to maturity of 8.5 percent. At what price will the bonds sell in the marketplace? Explain.
Pullman Corp issued 10-year bonds four years ago with a coupon rate of 9.375 percent. At the time of issue, the bonds sold at par. Today bonds of similar risk and maturity must pay an annual coupon of 6.25 percent to sell at par value. Assuming semiannual coupon payments, what will be the current
Marshall Company is issuing eight-year bonds with a coupon rate of 6.5 percent and semiannual coupon payments. If the current market rate for similar bonds is 8 percent, what will be the bond price? If the company wants to raise $1.25 million, how many bonds does the firm have to sell?
Rockne, Inc., has outstanding bonds that will mature in six years and pay an 8 percent coupon semiannually. If you paid $1,036.65 today and your required rate of return was 6.6 percent, did you pay the right price for the bond?
Nanotech, Inc., has a bond issue maturing in seven years that is paying a coupon rate of 9.5 percent (semiannual payments). The company wants to retire a portion of the issue by buying the securities in the open market. If it can refinance at 8 percent, how much will Nanotech pay to buy back its
Kintel, Inc., wants to raise $1 million by issuing six-year zero coupon bonds with a face value of $1,000. Its investment banker states that investors would use an 11.4 percent discount rate to value such bonds. At what price would these bonds sell in the marketplace? How many bonds would the
Rockinghouse Corp. plans to issue seven-year zero coupon bonds. It has learned that these bonds will sell today at a price of $439.76. Assuming annual coupon payments, what is the yield to maturity on these bonds?
Electrolex, Inc., has four-year bonds outstanding that pay a coupon rate of 6.6 percent and make coupon payments semiannually. If these bonds are currently selling at $914.89, what is the yield to maturity that an investor can expect to earn on these bonds? What is the effective annual yield?
SerengetiCorp has five-year bonds outstanding that pay a coupon of 8.8 percent. If these bonds are priced at $1,064.86, what is the yield to maturity on these bonds? Assume semiannual coupon payments. What is the effective annual yield?
Adrienne Dawson is planning to buy 10-year zero coupon bonds issued by the U.S. Treasury. If these bonds have a face value of $1,000 and are currently selling at $404.59, what is the expected return on them? Assume that interest compounds semiannually on similar coupon paying bonds.
Brown & Co. issued seven-year bonds two years ago that can be called aft er two years. The bonds make semiannual coupon payments at a coupon rate of 7.875 percent. Each bond has a market value of $1,053.40, and the call price is $1,078.75. If an investor purchased the bonds at par value when
Trevor Price bought 10-year bonds issued by Harvest Foods five years ago for $936.05. The bonds make semiannual coupon payments at a rate of 8.4 percent. If the current price of the bonds is $1,048.77, what is the yield that Trevor would earn by selling the bonds today?
You bought a six-year bond issued by Runaway Corp. four years ago. At that time, you paid $974.33 for the bond. The bond pays a coupon rate of 7.375 percent, and coupon payments are made semiannually. Currently, the bond is priced at $1,023.56. What yield can you expect to earn on this bond if you
Lopez Information Systems is planning to issue 10-year bonds. The going market yield for such bonds is 8.125 percent. Assume that coupon payments will be made semiannually. The firm is trying to decide between issuing an 8 percent coupon bond or a zero coupon bond. The company needs to raise $1
Showbiz, Inc., has issued eight-year bonds with a coupon of 6.375 percent and semiannual coupon payments. The market’s required rate of return on such bonds is 7.65 percent.a. What is the market price of these bonds?b. If the above bond is callable aft er five years at an 8.5 percent premium on
Peabody Corp. has seven-year bonds outstanding. The bonds pay a coupon of 8.375 percent semiannually and are currently worth $1,063.49. The bonds can be called in three years at a price of $1,075.a. What is the yield to maturity of these bonds?b. What is the effective annual yield?c. What is the
The Maryland Department of Transportation has issued 25-year bonds that make semiannual coupon payments at a rate of 9.875 percent. The current market rate for similar securities is 11 percent.a. What is the current market value of one of these bonds?b. What will be the bond’s price if rates in
Rachette Corp. has 18-year bonds outstanding. These bonds, which pay interest semiannually, have a coupon rate of 9.735 percent and a yield to maturity of 7.95 percent.a. Compute the current price of these bonds.b. If the bonds can be called in five years at a premium of 13.5 percent over par
Zippy Corporation just sold $30 million of convertible bonds with a conversion ratio of 40. Each $1,000 bond is convertible into 25 shares of Zippy’s stock.a. What is the conversion price of Zippy’s stock?b. If the current price of Zippy’s stock is $15 and the Company’s annual stock return
Torino Foods issued 10-year bonds three years ago with a coupon of 6 percent. If the current market rate is 8.5 percent and the bonds make annual coupon payments, what is the current market value of one of these bonds?
Kim Sundaram recently bought a 20-year zero coupon bond that compounds interest semiannually. If the current market rate is 7.75 percent, what is the maximum price he should have paid for this bond?
Five-year bonds issued by Infotech Corporation are currently priced at $1,065.23. They make semiannual coupon payments of 8.5 percent. If you bought these bonds today, what would be the yield to maturity and effective annual yield that you would earn?
The Gold Company is applying for a five-year term loan from its bank. The lender determines that the firm should pay a default risk premium of 1.75 percent over the Treasury rate. The five-year Treasury rate is currently 5.65 percent. The firm also faces a marketability risk premium of 0.80
Trojan Corp. has issued seven-year bonds with a 7 percent semiannual coupon payment. If the opportunity cost for an investor is percent, what is the maximum price that she should be willing to pay for this bond?
What is NASDAQ?
How do dealers differ from brokers?
List the major stock market indexes and explain what they tell us.
What does the price-earnings ratio tell us?
Why do some people view preferred stock as a special type of a bond rather than a stock?
What is the general formula used to calculate the price of a share of a stock? What does it mean?
What are growth stocks and why do they typically pay little or no dividends?
What three different models are used to value stocks based on different dividend patterns?
Explain why the growth rate g must always be less than the rate of return R.
Why can skipping payment of a preferred dividend be a bad signal?
How is a preferred stock with a fixed maturity valued?
Why can the market price of a stock differ from its true (intrinsic) value?
Why are investors and managers concerned about stock market efficiency?
Why are common stockholders considered to be more at risk than the holders of other types of securities?
Under what conditions does it make sense to use the constant-growth dividend model to value a stock?
What does it mean when a company has a very high P/E ratio? Give examples of industries in which you believe high P/E ratios are justified.
Preferred stock is considered to be nonparticipating because:a. Investors do not participate in the election of the firm’s directors.b. Investors do not participate in the determination of the dividend payout policy.c. Investors do not participate in the firm’s earnings growth.d. None of the
Explain why preferred stock is considered to be a hybrid of equity and debt securities.
Why is stock valuation more difficult than bond valuation?
You are currently thinking about investing in a stock valued at $25.00 per share. The stock recently paid a dividend of $2.25 and its dividend is expected to grow at a rate of 5 percent for the foreseeable future. You normally require a return of 14 percent on stocks of similar risk. Is the stock
Stock A and Stock B are both priced at $50 per share. Stock A has a P/E ratio of 17, while Stock B has a P/E ratio of 24. Which is the more attractive investment, considering everything else to be the same, and why?
What is a stock market index?
What is the Dow Jones Industrial Average?
What does NASDAQ stand for? What is NASDAQ?
What is a dividend yield? What does it tell us?
Present value of dividends: Fresno Corp. is a fast-growing company that expects to grow at a rate of 30 percent over the next two years and then to slow to a growth rate of 18 percent for the following three years. If the last dividend paid by the company was $2.15, estimate the dividends for the
Zero growth: Nynet, Inc., paid a dividend of $4.18 last year. The company’s management does not expect to increase its dividend in the forseeable future. If the required rate of return is 18.5 percent, what is the current value of the stock?
Knight Supply Corp. has not grown for the past several years and management expects this lack of growth to continue. The firm last paid a dividend of $3.56. If you require a rate of return of 13 percent, what is the current value of this stock to you?
Ron Santana is interested in buying the stock of First National Bank. While the bank expects no growth in the near future, Ron is attracted by the dividend income. Last year the bank paid a dividend of $5.65. If Ron requires a return of 14 percent on such stocks, what is the maximum price he should
The current stock price of Largent, Inc., is $44.72. If the required rate of return is 19 percent, what is the dividend paid by this firm if the dividend is not expected to grow in the future?
Moriband Corp. paid a dividend of $2.15 yesterday. The company’s dividend is expected to grow at a steady rate of 5 percent for the forseeable future. If investors in stocks of companies like Moriband require a rate of return of 15 percent, what should be the market price of Moriband stock?
Nyeil, Inc., is a consumer products firm that is growing at a constant rate of 6.5 percent. The firm’s last dividend was $3.36. If the required rate of return is 18 percent, what is the market value of this stock if dividends grow at the same rate as the firm?
Reco Corp. is expected to pay a dividend of $2.25 next year. The forecast for the stock price a year from now is $37.50. If the required rate of return is 14 percent, what is the current stock price? Assume constant growth.
Proxicam, Inc., is expected to grow at a constant rate of 7 percent. If the company’s next dividend, which will be paid in a year, is $1.15 and its current stock price is $22.35, what is the required rate of return on this stock?
X-Centric Energy Company has issued perpetual preferred stock with a stated (par) value of $100 and a dividend of 4.5 percent. If the required rate of return is 8.25 percent, what is the stock’s current market price?
The First Bank of Ellicott City has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.65 on this stock. What is the current price of this preferred stock given a required rate of return of 11.6 percent?
Preferred stock valuation: The preferred stock of Axim Corp. is currently selling at $47.13. If the required rate of return is 12.2 percent, what is the dividend paid by this stock?
Each quarter, Sirkota, Inc., pays a dividend on its perpetual preferred stock. Today the stock is selling at $63.37. If the required rate of return for such stocks is 15.5 percent, what is the quarterly dividend paid by this firm?
Constant growth: Kay Williams is interested in purchasing the common stock of Reckers, Inc., which is currently priced at $37.45. The company is expected to pay a dividend of $2.58 next year and to increase its dividend at a constant rate of 7 percent.a. What should the market value of the stock be
Constant growth: The required rate of return is 23 percent. Ninex Corp. has just paid a dividend of $3.12 and is expected to increase its dividend at a constant rate of 5 percent. What is the expected price of the stock three years from now?
Jenny Banks is interested in buying the stock of Fervan, Inc., which is increasing its dividends at a constant rate of 6 percent. Last year the firm paid a dividend of $2.65. The required rate of return is 16 percent. What is the current value of this stock? What should be the price of the stock in
Constant growth: You own shares of Old World DVD Company and are interested in selling them. With so many people downloading music these days, sales, profits, and dividends at Old World have been declining 6 percent per year. The firm just paid a dividend of $1.15 per share. The required rate of
You own a company that competes with Old World DVD Company (in the previous problem). Instead of selling DVDs, however, your company sells music downloads from a Web site. Th ings are going well now, but you know that it is only a matter of time before someone comes up with a better way to
Tre-Bien, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a constant-growth rate of 8 percent is expected. The firm expects to pay its first dividend of $2.45
ProCor, a biotech firm, forecasted the following growth rates for the next three years: 35 percent, 28 percent, and 22 percent. The company then expects to grow at a constant rate of 9 percent forever. The company paid a dividend of $1.75 last week. If the required rate of return is 20 percent,
Revarop, Inc., is a fast-growth company that is expected to grow at a rate of 23 percent for the next four years. It is then expected to grow at a constant rate of 6 percent. Revarop’s first dividend, of $4.25, will be paid in year 3. If the required rate of return is 17 percent, what is the
Quansi, Inc., management expects to pay no dividends for the next six years. It has projected a growth rate of 25 percent for the next seven years. Aft er seven years, the firm will grow at a constant rate of 5 percent. Its first dividend, to be paid in year 7, will be $3.25. If the required rate
Staggert Corp. will pay dividends of $5.00, $6.25, $4.75, and $3.00 in the next four years. Thereafter, the company expects its dividend growth rate to be constant at 6 percent. If the required rate of return is 18.5 percent, what is the current value of the stock?
Diaz Corp. is expected to grow rapidly at a rate of 35 percent for the next seven years. The company’s first dividend, to be paid three years from now, will be $5. Aft er seven years, the company (and the dividends it pays) will grow at a rate of 8.5 percent. What is the value of Diaz stock with
Tin-Tin Waste Management, Inc., is growing rapidly. Dividends are expected to grow at rates of 30 percent, 35 percent, 25 percent, and 18 percent over the next four years. Thereafter, management expects dividends to grow at a constant rate of 7 percent. The stock is currently selling at $47.85, and
Equation 9.4 shows the relation between a stock’s value and the dividend that is expected next year if dividends grow at a constant rate forever. If a firm pays all of its earnings as dividends, show how Equation. 9.4 can be rearranged to calculate that firm’s P/E ratio. What does this tell us
Riker Departmental Stores management has forecasted a growth rate of 40 percent for the next two years, followed by growth rates of 25 percent and 20 percent for the following two years. It then expects growth to stabilize at a constant rate of 7.5 percent forever. The firm paid a dividend of $3.50
Courtesy Bancorp issued perpetual preferred stock a few years ago. The bank pays an annual dividend of $4.27 and your required rate of return is 12.2 percent.a. What is the value of the stock given your required rate of return?b. Should you buy this stock if its current market price is $34.41?
Rhea Kirby owns shares in Ryoko Corp. Currently, the market price of the stock is $36.34. Management expects dividends to grow at a constant rate of 6 percent for the foreseeable future. Its last dividend was $3.25. Rhea’s required rate of return for such stocks is 16 percent. She wants to find
Perry, Inc., paid a dividend of $2.50 yesterday. You are interested in investing in this company, which has forecasted a constant-growth rate of 7 percent for its dividends, forever. The required rate of return is 18 percent.a. Compute the expected dividends D1, D2, D3, and D4.b. Compute the
Zweite Pharma is a fast-growing drug company. Management forecasts that in the next three years, the company’s dividend growth rates will be 30 percent, 28 percent, and 24 percent, respectively. Last week it paid a dividend of $1.67. Aft er three years, management expects dividend growth to
Triton Inc., is expected to grow at a rate of 22 percent for the next five years and then settle to a constant growth rate of 6 percent. The company recently paid a dividend of $2.35. The required rate of return is 15 percent.a. Find the present value of the dividends during the rapid-growth period
Ceebros Builders is expanding very fast and is expected to grow at a rate of 25 percent for the next four years. The company recently paid a dividend of $3.60 but is not expected to pay any dividends for the next three years. In year 4, management expects to pay a $5 dividend and thereafter to
Mason Corp. is a manufacturer of consumer staples and has experienced no growth for the past five years while paying a dividend of $3.50 every year. The CFO expects the firm to have no growth and for dividends to remain constant for the foreseeable future. If the required rate of return is 10
Bucknell, Inc., recently paid a dividend of $2.10. Management forecasts dividend growth of 6 percent per year for the foreseeable future. What is the value of the stock today with a discount rate of 13 percent?
Bradley Corp. is growing at a constant rate of 7.2 percent every year. Last week the company paid a dividend of $1.85. If dividends are expected to grow at the same rate as the firm and the required rate of return is 15 percent, what should be the stock’s price four years from now?
Wichita Technologies is expected to grow at a rate of 35 percent for the next three years and then stabilize with annual growth of 7 percent. The company will pay no dividend for the first two years and will pay a dividend of $1.25 in year3. What will be the value of the company’s stock when the
UNC Bancorp has issued preferred stock with no maturity date. It has a par value of $100 and pays a quarterly dividend of $2.25. If the required rate of return is 8 percent, what is the value of the stock today?
What types of questions can be answered by analyzing financial statements?

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Understanding financial statements 9th Edition Lyn M. Fraser, Aileen Ormiston - Solutions

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