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Chapter 10 - Valuation and Rates of Return
98. Market Enterprises would like to issue bonds and needs to determine the approximate rate
they would need to pay investors. A firm with similar risk recently issued bonds with the
following current features a 5% coupon rate, 10 years until maturity, and a current price of
$1,150. At what rate would Market Enterprises expect to issue their bonds, assuming annual
interest payments?
99. Star Corp. issued bonds 2 years ago with a 7% coupon rate. Their bonds are currently
trading for $928 in the market. Which of the following most likely has occurred since the time
of issue?
Chapter 10 - Valuation and Rates of Return
100. Two years ago, Maple Enterprises issued 4%, 20 years bonds and Temple Corp issued
4%, 10 year bonds. Since their time of issue, interest rates have increased. Which of the
following statements is true of each firm's bond prices in the market, assuming they have
equal risk?
101. The following adjustments must be made when interest is paid semi-annually vs.
annually except:
Chapter 10 - Valuation and Rates of Return
102. Doug has been approached by his broker to purchase a bond for $795. He believes the
bond should yield 8%. The bond pays 5% annual coupon rate and has 12 years left until
maturity. What should Doug's analysis of the bond indicate to him?
Chapter 10 - Valuation and Rates of Return
104. Match the following with the items below:
1. real rate of
It is the discount rate used in present-valuing future
2. risk-free rate of
This is payment for forgoing current consumption on a
3. dividend
An adjustment to the real rate of return to compensate
The potential inability to meet debt obligations as they
5. inflation
A method used to determine the value of a share of
A multiplier applied to earnings per share to determine
9. price-earnings
An extra return demanded based on a firm's business
10. yield to
A variable growth model characteristic of emerging
industries where rapid growth is experienced for a certain
number of years followed by more historic, constant
11. required rate of
The inability to hold a competitive position and
12. super-normal
The total return demanded by investors to compensate
The interest rate that compensates the investor for the
current use of funds and loss of purchasing power due to
Chapter 10 - Valuation and Rates of Return
105. The Nickelodeon Manufacturing Co. has a series of $1000 par value bonds outstanding.
Each bond pays interest semi-annually and carries an annual coupon rate of 6%. Some bonds
are due in four years while others are due in 10 years. If the required rate of return on bonds is
10%, what is the current price of:
a) the bonds with 4 years to maturity?
b) the bonds with 10 years to maturity?
c) Explain the relationship between the number of years until a bond matures and its price.
Chapter 10 - Valuation and Rates of Return
106. Fullerton Company's bonds are currently selling for $1,200.00 per $1000 par-value bond.
The bonds have a 10% coupon rate and will mature in 10 years. What is the approximate yield
to maturity?
Chapter 10 - Valuation and Rates of Return
107. Madison Corporation has a $1000 par value bond outstanding paying annual interest of
7%. The bond matures in 20 years. If the present yield to maturity for this bond is 8%,
calculate the current price of the bond using annual compounding. Use annual analysis.
Chapter 10 - Valuation and Rates of Return
108. Washington Corporation has a $1000 par value bond outstanding paying annual interest
of 6%. The bond matures in 25 years. If the present yield to maturity for this bond is 10%,
calculate the current price of the bond. Use annual analysis
Chapter 10 - Valuation and Rates of Return
109. The preferred stock of Gapers Inc. pays an annual dividend of $3.00. What is the price of
the preferred stock if the required return is:
a) 6%
b) 8%
c) 10%
Chapter 10 - Valuation and Rates of Return
110. The preferred stock of Lewis-Schultz Enterprises pays an annual dividend of $1.32.
What is the required return if the market value of the preferred stock:
a) $40
b) $30
c) $20
111. State Street Corp. will pay a dividend on common stock of $2.10 per share at the end of
the year. The required return on common stock (Ke) is 8%. The firm has a constant growth
rate of 5%. Compute the current price of the stock (Po).
Chapter 10 - Valuation and Rates of Return
112. Simon Fixtures Corp. is expected to pay $2.10 per share in dividends at the end of the
next 12 months. The growth rate in dividends is expected to be constant at 4% per year. If the
stock is selling for $50 per share, what is the required rate of return?
