Corporate Finance

Tutorial 2 Questions

Corporate Finance
Tutorial 2: Security Valuation
Questions
1.

Trico bonds have a coupon rate of 8%, a par value of $1,000, and will mature in
20 years. If you require a return of 7%, what price would you be willing to pay for
the bond? What happens if you pay more for the bond? What happens if you pay
less for the bond?

2.

National Steel 15-year $1,000 par value bonds pay 8% interest annually. The
market price of the bonds is $1,085, and your required rate of return is 10%.
a.
b.
c.

Compute the bonds expected rate of return

Determine the value of the bond to you, given your required rate of return.
Should you purchase the bond?

3.

What is the value of a preferred stock where the dividend rate is 14% on a $100
par value? The appropriate discount rate for a stock of this risk level is 12%.

4.

You own 200 shares of Somner resources preferred stock, which currently sells
for $40 per share & pays annual dividend of $3.40 per share.
a.
b.

What is your expected return?

If you require a 8% return and given the current price, should you sell or
buy more stocks?

5.

You intend to purchase Marigo common stock at $50 per share, hold it for a year,
and sell after a dividend of $6 is paid. How much will the stock price have to
appreciate if your required rate of return is 15%?

6.

An investor is considering buying a certain equity share. The stock has just paid a
dividend of $0.50, and both the investor and the market expect the future dividend
to be precisely at this level forever. The required rate of return on similar equities
is eight per cent. What price should the investor pay for a single equity share?

7.

A stock has just paid a dividend of $0.25. Dividends are expected to grow at a
constant annual rate of five per cent. The required rate of return on the share is 10
per cent. Calculate the price of the stock.

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Corporate Finance

8.

Tutorial 2 Questions

You are considering 3 investments. The first is a bond selling in the market at
$1,100. The bond has a $1,000 par value, pays interest at 13%, and is scheduled to
mature in 15 years. For the bonds of this risk class, you believe that a 14% rate of
return should be required. The second investment is a preferred stock ($100 par)
that sells for $90 and pays an annual dividend of $13. Your required rate of return
for this stock is 15%. The last investment is common stock ($25 par) that recently
paid a $2 dividend. The firms EPS have increased from $3 to $6 in 10 years,
which also reflects the expected growth in dividends per share for the indefinite
future. The stock is selling for $20, and you think a reasonable required rate of
return for the stock is 20%.
a.

Calculate the value of each security based on your required rate of return.

b.

Which investment(s) should be accepted? Why?

c.

(i)

If your required rates of return changed to 12% for the bond, 14%
for the preferred stock, and 18% for the common stock, how would
your answers change in parts (a) and (b) above?

(ii)

Assuming again that your required rate of return for the common
stock is 20%, but the anticipated growth rate changes to 12%,
would your answers to (a) and (b) be different?

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