Chapter 7
PART I
#3.Consider Borden's 8 ¾ percent bonds that mature on April 15, 2016. Assume that the interest on these bonds is paid and compounded annually. Determine the value of a $1000 denomination Borden bond as of April 15, 2004., to an investor who holds the bond until maturity and whose required rate of return is:
a)7 percent
b)9 percent
c)11 percent
d) What would be the value of the Borden bonds at an 8 percent required rate of return if the interest were paid and compounded semiannually?
Please see the attached excel sheet
#8If you purchase a zero coupon bond today for $225 and it matures at $1,000 in 11 years, what rate of return will you earn on that bond (to the nearest 1/10 of 1 percent)?
14.52%
Please see the attached excel sheet
#11Determine the value of a share of DuPont Series A $4.50 cumulative preferred stock, no par, to an investor who requires a 9 percent rate of return on this security. The issue is callable at $120 per share plus accrued dividends. However, the issue is not expected to be called at any time in the foreseeable future.
P0 = Dp/kp
Dp = $4.50; kp = 0.09
P0 = $4.50/0.09 = $50
#16Zabberer Corporation bonds pay a coupon rate of interest of 12 percent annually and have a maturity value of $1,000. The bonds are scheduled to mature at the end of 14 years. The company has the option to call the bonds in eight years at a premium of 12 percent above the maturity value. You believe the company will exercise its option to call the bonds at that time. If you require a pretax return of 10 percent on bonds of this risk, how much would you pay for one of these bonds today?
Po = $120(PVIFA0.10,8) + $1120(PVIF0.10,8)
= $120(5.335) + $1120(0.467)
= $1,163
Part II
#4Cascade Mining Company expects its earnings and dividends to increase by 7 percent per year over the next six years and then to remain relatively constant thereafter. The firm currently (that is, as of year 0) pays a dividend of $5 per share. Determine the value of a share of Cascade stock to an investor with a 12 percent required rate of return.
Present Value of First 6-Years' Dividends:
6
S[Do(1 + g1)t/(1 + ke)t]; Do = $5.00; g1 = .07; ke = .12
t=1
Present Value
Year Dividend Interest Factor Present Value
t Dt = 5.00(1 + .07)t PVIF.12,t Dt x PVIF.12,t
1 5.00(1 + .07)1 = .893 $ 4.778
$5.35
2 5.00(1 + .07)2 = .797 4.563
5.725
3 5.00(1 + .07)3 = .712 4.361
6.125
4 5.00(1 + .07)4 = .636 4.168
6.554
5 5.00(1 + .07)5 = .567 3.976
7.013
6 5.00(1 + .07)6 = .507 3.805
7.504
PV (First 6-Years' Dividends) $25.651
Value of Stock at End of Year 6:
P6 = D7/(ke - g2) g2 = .00
D7 = D6(1 + g2) = 7.504(1 + .00) = $7.504
P6 = 7.504/(.12 - .00) = $62.533
Present Value of P6:
PV(P6) = P6/(1 + ke)6 = 62.533/(1 + .12)6 = 62.533 x PVIF.12,6
= 62.533 X .507 = $31.704
Value of Common Stock (Po):
Po = PV (First 6-Years' Dividends) + PV(P6)
= 25.651 + 31.704 = $57.36 (tables)
#5Over the past five years, the dividends of the Gamma Corporation have grown from $0.70 per share to the current level of $1.30 per share (Do). This growth rate (computed to 1/10 of 1 percent accuracy) is expected to continue for the foreseeable future. What is the value of a share of Gamma Corporation common stock to an investor who requires a 20 percent return on her investment?
FVn = PV0 (1 + g)n
PV0 = $.70FV5 = $1.30n = 5
1.30 = .70(1 + g)5
(1 + g)5 = 1.857
g = 13.2%
P0 = D1/(ke - g)D0 = $1.30ke = .20
D1 = D0(1 + g) = 1.30(1 + .132) = $1.4716
P0 = 1.4716/(.20 - .132) = $21.64
#14Canadian national Rail way sold 10 million shares of stock to the public at $30 per share. The company received net proceeds from its underwriters of $287,506,114. What was the underwriting spread from this stock offering?
Underwriting spread = Selling price to public - Proceeds to company
= ($30 x 10,000,000) - $287,506,114
= $12,493,886
# 27The following stock quotations were recently reported in The Wall Street Journal:
10.3AT&TT3.621&n bsp;39.430.26
0.1BoeingBA1.631 88.91-0.85
-8.7JohnsJohnsJNJ2.516 60.26-0.08
a. What are the dividend yields on the common stock of AT&T, Boeing, and Jonnson&Johnson?
b.What possible explanation can you give for the differences in the common stock dividend yields observed in Part a?
c.What is the current price-earnings ratio for Boeing and Johnson& Johnson?
d.What possible explanation can you give for the differences in the price-earnings ratios observed in Part C?
a. The dividend yield for AT&T is 3.6%; for Boeing it is 1.6%; and for Johnson & Johnson it is 2.5%.
b. These firms differ with respect to expected earnings and dividend growth, with AT&T likely having the lowest expected growth and Boeing the highest expected growth.
c. P/E for Boeing = 31 times
P/E for Johnson and Johnson = 16 times
d. Boeing’s higher expected growth rate more than offsets the relatively lower expected risk of Johnson & Johnson, and since the P/E ratio is a measure to indicate the investors expectations about future returns, it is only natural that Boeing would have a higher P/E ratio.
#28Blue Moon Corporations has one million shares of common stock outstanding. In a typical annual election for the board of directors, shareholders representing 70 percent of the shares outstanding exercise their right to vote. The company has nine members on its board of directors, all of whom are elected annually.
a.If the company uses a majority voting procedure to elect its board, how many votes are required to elect:
1.One director
2.Two directors
3.A majority of the members of the board of directors
b.If the company uses a cumulative voting procedure, how many votes are required to elect:
1.One director
2.Two directors
3.A majority of the members of the board of directors
a. Number of votes cast = 0.7 x 1,000,000 = 700,000
i. 350,000 + 1
ii. 350,000 +1
iii. 350,000 +1
b. i. Number of shares = [(1) x (700,000)] / [(9) + 1] + 1 = 70,001
ii. Number of shares = [(2) x (700,000)] / [(9) + 1] + 1 = 140,001
iii. Number of shares = [(5) x (700,000)] / [(9) + 1] + 1 = 350,001