Valuation Problems: Stocks, Bonds, and Other Investments

1. What are the values ofthe three investments:

a. Stock in which you expect a dividend of $300 a year indefinitely. You feel you

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c. A parking lot that generated $40,000 in cash flow last year (time period 0). The cashflows are expected to grow at 4% per year. The required return is 11 percent.

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2. Cemex, a large cement provider, issued a 1 _percentcoupon interest rate, 10-year ~ /- '"bond with a $1,000 par value. The market ra for a bond like this (risk level ofcompany and maturity rate) is 11percent. The ompany is selling 100,000 of thesebonds. How much should these bonds sell for i the marketplace? Excludingtransaction costs, how much will Cemex collect? PMf-:::-lfJJ

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aJ/btkl-{ou decide to b M bonds that are selling in the open market for $950. The

coupon rate s 8 percent. ~e bonds mature in 10 years. What is the Yield-to-Maturity of thes nds? t 0 'b )C{O~ COO 0 "\

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4. You just bought IBM bonds that mature in twenty years. You paid $1,000 (parvalue). The bonds have a coupon rate of8 percent. If interest rates fall and the.

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d return on yonr bond is now 6 pereent,

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what is the value of your bond?

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V 5. You also own an IBM bond that matures in two years. Let's assume it is selling for$1,000 on the open market and has a coupon rate of8 percent. If interest rates falland the required return on your bond is now 6 percent, what is the value of your bond

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6. Look at the new value of the bonds in problems 4 and 5. The same change in interestrates occurred. Did the value of the bonds change the same amount? Can you makesense of this?

7. Using the Gordon Model, calculate the value of the following stock. The required

@retum is 9.5%. The dividend growth rate = 7%. The dividend one period out is

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8. Assume in the above problem that the company has just landed a major account inAsia. Assume the risk level of the company hasn't changed but the expected growth

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endSone period out = $2.81.

cP at is the value of the stock using the Gordon Growth Model?

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9. What are the limitations of the Gordon Growth Model?

10. Using the above problems, explain how taking on a new project (e.g., Asia) canincrease or decrease the value of a stock.

11. Alligators R Us is contemplating expansion through the issuance of debtlbonds. Yourbroker calls you and suggests that you buy 10 bonds-price $1,150 for each bond, 11percent coupon rate, $1,000 par value, interest paid annually. The bonds mature in12 years. Calculate the Yield-to-Maturity (YTM). Are the bonds selling at a discount

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P""-I= 110 ~, q /'1 frlM{V/I.-f12. The average PE ratio for s . nauctor stoc s IS O. Triquint Semiconductor

(TQNT) has average risk and growth prospects compared to the rest of the industry.Ifthe company has Earnings Per Share of $2.00, what would be a fair stock price? Ifthe company has 140,000,000 shares outstanding, what would be a fair marketcapitalization (aka market cap) for TQNT. What was Triquint's Net Income?

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Solutions

la. Solution: $3,000

lb. Solution: $120,563

lc. Solution: $628,571

2. Solution: $941.92 Market Value; $94,192,000 collected

3. Solution: 8.77% PV = -$950, n = 10, pmt = $80, FV = $1,000, CPT = T/Y

4. Solution: $1,229

5. Solution: $1,037

7. Solution: $110.40-- $2.76/(.095-.07)

8. Solution: $562.00

11. Solution: 8.91%, premium; premium> $1,000, discount < $1,000

12. Solution: $40 per share; $5.6 billion market cap; $280,000,000 Net Income

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