Chapter 4 - Bond and Stock Valuations
Chapter 4 - Bond and Stock Valuations
Chapter 4 - Bond and Stock Valuations
Solution:
Given: Annually
Coupon Rate , C = 8%
Interest Payment, I=MV x C 80
Kd = 10%
MV = 1000
Required:
Value of Perpetual Bond? Infinit life
V = I / Kd 800.00
Non-Zero Coupon-paying Bond
Solution:
Given: Annually
Coupon Rate , C = 8%
Interest Payment, I=MV x C 80
Kd = 10%
MV = 1000
n= 30
VB = 754.15 + 57.31
VB = 811.46
Solution:
Given: Annually
Coupon Rate , C = 8%
Interest Payment, I=MV x C 80
Kd = 9%
MV = 1000
n= 10
VB = 513.41 + 422.41
VB = 935.82
Zero Coupon Bond
Solution:
Given: Annually
Coupon Rate , C = 0%
Interest Payment, I=MV x C 0
Kd = 10%
MV = 1000
n= 30
VB = 0.00 + 57.31
VB = 57.31
Solution:
Annually:
VB = 608.49 + 239.39
VB = 847.88
Solution:
Annually:
VB = 449.74 + 25.57
VB = 475.30
Annually:
VB = 483.31 + 33.38
VB = 516.69
Solution:
B)
Annually:
VB = 1,089.24 + 92.30
VB = 1,181.54
Solution:
Annually:
VB = 805.21 + 463.19
VB = 1,268.40
Solution:
Given:
Par Value or Face Value = 100
C Rate = 8%
Discount Rate (Kp) is = 10%
Required:
Value of preferred Stock ?
Solution:
Divp = C x MV 8.00
V= 80.0
Common Sotck-Constant Growth
Solution:
Given:
Dividend per Share (Do) is = 3.24
Dividend Growth Rate (g) is = 8%
Discount Rate (Ke) is = 15%
Required:
Value of Common Stock ?
Solution:
V= 50.0
Common Sotck- Zero Growth Model
Solution:
Given:
Dividend per Share (Do) is = 3.24
Dividend Growth Rate (g) is = 0%
Discount Rate (Ke) is = 15%
Required:
Value of Common Stock ?
Solution:
V= 21.6
Common Sotck- Growth Phases Model
Solution:
Given:
Dividend per Share (Do) is = 3.24
Dividend Growth Rate (g1) is = 16% for t1= 3
Dividend Growth Rate (g2) is = 8% for t2= 3
Discount Rate (Ke) is = 15%
T is the total number of years
Required:
Value of Common Stock ?
Solution:
D0 3.24
D1=Dox(1+g1) 3.76 V1= 3.27
D2=Do x(1+g1)^2 4.36 V2= 3.30
D3=Do x(1+g1)^3 5.06 V3= 3.33
D4=D3 x(1+g2)^1 5.46 for t>3 V4= 51.30 for n=3
V= 61.19
Determining Bond YTM
Solution:
Given:
Po is the current market price of the bond. 1,250
C is the annual coupon Rate 10%
YTM is the yield to maturity (expressed as a decimal). ?
MV is the face value of the bond. 1,000
n is the total number of periods (in years to maturity). 15
I=C*MV 100
Required:
What is YTM?
Solution:
YTM is to be calculated based on Trial and Error Method using different Kd=YTM values:
YTM = Kd = 7.23%
Determining Bond YTM
Solution:
Given:
Po is the current market price of the bond. 850
C is the annual coupon Rate 10%
YTM is the yield to maturity (expressed as a decimal). ?
MV is the face value of the bond. 1,000
n is the total number of periods (in years to maturity). 12
I=C*MV 100
Required:
What is YTM?
Solution:
YTM is to be calculated based on Trial and Error Method using different Kd=YTM values:
YTM = Kd = 12.49%
Determining Bond YTM
Solution:
Given:
Po is the current market price of the bond. 1,494.93
C is the annual coupon Rate 10%
YTM is the yield to maturity (expressed as a decimal). ?
MV is the face value of the bond. 1,000
n is the total number of periods (in years to maturity). 14
I=C*MV 100
Required:
What is YTM?
Solution:
YTM is to be calculated based on Trial and Error Method using different Kd=YTM values:
Solution:
Given:
Po is the current market price of the bond. 950
C is the semi-annual coupon payment. 8%
YTM is the yield to maturity (expressed as a decimal). ?
MV is the face value of the bond. 1,000
n is the total number of periods (in years to maturity). 20
I=C*MV 80
Required:
What is YTM?
Solution:
YTM is to be calculated based on Trial and Error Method using different Kd= values:
Kd= 8.55%
Solution:
Given:
Po is the current market price of the bond. 515.16
C is the semi-annual coupon payment. 6%
YTM is the yield to maturity (expressed as a decimal). ?
MV is the face value of the bond. 1,000
n is the total number of periods (in years to maturity). 30
I=C*MV 60
Required:
What is YTM?
Solution:
YTM is to be calculated based on Trial and Error Method using different Kd= values:
Kd= 12.04%
Solution:
Given:
Po =is the current market price of the bond. 950
C = is the annual coupon Rate 6%
YTM = is the yield to maturity (expressed as a decimal). ?
MV = is the face value of the bond. 1,000
n =t, is the total number of periods (in years to maturity). 5
I=C*MV 60
Required:
What is YTM?
Solution:
YTM is to be calculated based on Trial and Error Method using different Kd=YTM values:
YTM = Kd = 7.23%
Determining Bond Yield To Call (YTC)
Solution:
Given:
Po is the current market price of the bond. 1,494.93
C is the annual coupon Rate 10%
YTC Yield to Call ?
MV is the face value of the bond. 1,000
Call Price 1,100
n is the total number of periods (in years to maturity). 10
N = Adjusted N = n-1 after One year in the given question 9
I=C*MV 100
Required:
What is YTC?
Solution:
YTC is to be calculated based on Trial and Error Method using different Kd=YTC values:
Solution:
Given:
Po is the current market price of the bond. 100
(Divp) Annual Dividend per Share = 10
What is the yield on preferred stock? ?
Required:
What is the yield on preferred stock? Kp
Solution:
Divp = C x MV 10.00
Kp = 10.0%
Determining the Yield on Common Stock
Solution:
Given:
Po is the current market price of the bond. 30
(Divp) Annual Dividend per Share = 3
(g) expected growth rate = 5%
What is the yield on common stock? ?
Required:
What is the yield on common stock? Ks
Solution:
Ks= 15.0%
Compute Cost Preferred Stock
Solution:
Given:
Dividend (Dp) = 5
Net Price of Preferred Stock = Market Price - F = 42
Required:
The cost of preferred stock?
Solution:
Kp= 11.9%
Compute Cost of Common Equity
Solution:
Given:
Dividend per share (Do) = 3
Market Price per share (Po) = 60
Growth rate (g) = 10%
Required:
Compute the Cost of Common Equity?
Solution:
D1 = 3.3
Ks= 15.5%
Cost of New Common Stock Equity
Solution:
Given:
Dividend per share (Do) = 6
Market Price per share (Po) = 75
Growth rate (g) = 0%
Floatation cost rate (F) = 5%
Required:
Compute the Cost of NEW Common Equity?
Solution:
D1 = 6
Po - F = 71.25
Kn= 8.42%
Weighted Average Cost of Capital
Gallagher Corporation estimates the following costs for each component in its capital structure:
Solution:
Given:
kd(cost of debt) = 10%
kp (cost of preferred stock) = 11.9%
kcs(cost of retained earnings) = 15%
Kn for New share Equity 16.25%
Wd(weight of debt) = 40%
Wp (weight of preferred stock) = 10%
Wcs(weight of common equity) = 50%
Tc(corporate tax rate) = 40%
Required:
Weighted Average Cost of Capital (WACC) ?
Solution:
To calculate the Weighted Average Cost of Capital (WACC), we use the formula:
(A) If using retained earnings to finance the common stock portion the capital structure
WACC = 11.09%
(B) If using a new equity issue to finance the common stock portion the capital structure
Solution:
Given:
kd(cost of debt) = 9%
kp (cost of preferred stock) = 0.0%
kcs(cost of retained earnings) = 13%
Kn for New share Equity 0.00%
Wd(weight of debt) = 40%
Wp (weight of preferred stock) = 0%
Wcs(weight of common equity) = 60%
Tc(corporate tax rate) = 40%
Required:
Weighted Average Cost of Capital (WACC) ?
Solution:
To calculate the Weighted Average Cost of Capital (WACC), we use the formula:
WACC = 9.96%
Solution:
Given:
kd(cost of debt) = 7.35%
kp (cost of preferred stock) = 11.69%
kcs(cost of common stock) = 14.43%
Kre Cost of retained earnings 14.44%
Required:
Weighted Average Cost of Capital (WACC) ?
Solution:
To calculate the Weighted Average Cost of Capital (WACC), we use the formula:
Weight
Cost of
Item Book value (based on WACC
Capital
BV)
Bond 20,000 0.1143 7.35% 0.00840
Preferred Stock 5,000 0.0286 11.69% 0.00334
Common 60,000 0.3429 14.43% 0.04947
RE 90,000 0.5143 14.44% 0.07426
Total 175,000 1.0000 13.55%
WACC = 13.55%
Weighted Average Cost of Capital
Solution:
Given:
kd(cost of debt) = 3.50%
kp (cost of preferred stock) = 8.00%
kcs(cost of common stock) = 12.00%
Required:
Weighted Average Cost of Capital (WACC) ?
Solution:
To calculate the Weighted Average Cost of Capital (WACC), we use the formula:
Weight
Cost of
Item Book value (based on WACC
Capital
BV)
Dept 2,000,000 0.3077 3.50% 0.01077
Preferred Stock 500,000 0.0769 8.00% 0.00615
Common + Retained 4,000,000 0.6154 12.00% 0.07385
WACC = 9.08%
Weighted Average Cost of Capital
Solution:
Given:
kd(cost of debt) = 4.50%
kp (cost of preferred stock) = 7.00%
kcs(cost of common stock) = 14.00%
Kre Cost of retained earnings 0.00%
Tc(corporate tax rate) = 25.0%
Weightage
Wd(weight of debt) = 1,500,000 30.00%
Wp (weight of preferred stock) = 300,000 6.00%
Wcs(weight of common equity) +(Weight retained) = 3,200,000 64.00%
Required:
Weighted Average Cost of Capital (WACC) ?
Solution:
To calculate the Weighted Average Cost of Capital (WACC), we use the formula:
Weight
Cost of
Item Book value (based on WACC
Capital
BV)
Dept 1,500,000 0.3000 4.50% 0.01350
Preferred Stock 300,000 0.0600 7.00% 0.00420
Common 3,200,000 0.6400 14.00% 0.08960
WACC = 10.73%
Weighted Average Cost of Capital
Solution:
Given:
kd(cost of debt) = 6.00%
kp (cost of preferred stock) = 8.00%
kcs(cost of common stock) = 12.00%
Kre Cost of retained earnings 11.50%
Tc(corporate tax rate) =
Weightage
Wd(weight of debt) = 2,500,000 21.37%
Wp (weight of preferred stock) = 1,200,000 10.26%
Wcs(weight of common equity) = 5,000,000 42.74%
Wcs(weight of retained earnings) = 3,000,000 25.64%
TOTAL = 11,700,000 100.00%
Required:
Weighted Average Cost of Capital (WACC) ?
Solution:
To calculate the Weighted Average Cost of Capital (WACC), we use the formula:
Weight
Cost of
Item Book value (based on WACC
Capital
BV)
Dept 2,500,000 0.2137 6.00% 0.01282
Preferred Stock 1,200,000 0.1026 8.00% 0.00821
Common 5,000,000 0.4274 12.00% 0.05128
Retained earnings 3,000,000 0.2564 11.50% 0.02949
Total 11,700,000 1.0000 10.18%
WACC = 10.18%