Deck 3: Valuing Bonds and Valuing Stocks

Question 1

Bavarian Sausage's enterprise value is $75,000,000, the market value of its debt is $23,000,000 and the market value of its preferred stock is $5,000,000. If the company has 3,500,000 shares outstanding, what should be Bavarian Sausage's stock price?

A) $14.86
B) $21.43
C) $13.43
D) $6.57

Answer 1

$13.43

Question 2

Miller Juice
Miller Juice is a young company that currently does not pay a dividend. The company retains all their earnings to finance their growth. However, ten years from now the company is expected to start paying a $1.50 dividend. According to research reports the dividend should then grow by 5% annually forever.

-If the required return on the stock investment is 13%, what should be Miller's stock price today?

A) $19.69
B) $6.24
C) $15.62
D) $10.37

Answer 2

$6.24

Question 3

Undetermined Corporation currently has a 10% weighted average cost of capital. It is concerned that its after-tax cost of debt will increase in the near future by 2%. If Undetermined finances its projects with 30% debt, then what will the new weighted average cost of capital for Undetermined be?

A) 12.0%
B) 13. %
C) 10.6%
D) none of the above

Answer 3

10.6%

Question 4

Kramerica, Inc.
Kramerica Inc. just paid its investors a dividend of $2.00. This growing company expects dividends to grow at 20% for the next 2 years. After year 2, dividends are expected to grow constantly at 5% per year. Investors require a 15% return on Kramerica stock.

-What is the equation to price Kramerica stock?

A)
B)
C)
D)

Question 5

ABC Corporation
ABC Corporation just paid a dividend of $1.50 a share. The dividend is expected to grow at 10% a year for the next 2 years, and the 5% per year thereafter. The required return to invest in ABC stock is 12.50%.

-What is the expected dividend for ABC in year 2?

A) $1.65
B) $1.73
C) $1.82
D) $1.91

Question 6

ABC Corporation
ABC Corporation just paid a dividend of $1.50 a share. The dividend is expected to grow at 10% a year for the next 2 years, and the 5% per year thereafter. The required return to invest in ABC stock is 12.50%.

-What is the intrinsic value (or current price) of ABC?

A) $21.00
B) $22.98
C) $23.41
D) $24.48

Question 7

You estimate the following cash flows for Nick's Incorporated: D₁=$0.83, D₂=$0.87, D₃=$0.96, and P₃=$27.40. If the required return to hold Nick's stock is 15.1%, what is the price today for Nick's stock?

A) $18.31
B) $18.85
C) $19.98
D) $20.35

Question 8

For the zero growth model:

A) because the valuation formula reduces to the equation for the present value of a perpetuity the process is essentially the same for valuing preferred stock.
B) because the valuation formula reduces to the equation for the future value of a perpetuity the process is essentially the same for valuing preferred stock
C) because the valuation formula reduces to the equation for the present value of an ordinary annuity, the process is essentially the same for valuing preferred stock.
D) because the valuation formula reduces to the equation for the future value of an ordinary annuity, the process is essentially the same for valuing preferred stock.

Question 9

You just bought a 5-year zero coupon bond with a $1,000 face value for $735.67. What is the yield to maturity of this bond?

A) 10.36%
B) 6.33%
C) 4.69%
D) 8.18%

Question 10

You just bought a 5-year zero coupon bond with a $1,000 face value for $735.67. What is the taxable capital gain on this bond next year?

A) $274.33
B) $68.51
C) $169.47
D) $46.64

Question 11

The real return is 10% and the expected rate of inflation is 4.5%. What is the nominal rate?

A) 4.50%
B) 14.95%
C) 10.00%
D) 8.69%

Question 12

You notice that the price of a 4.0% coupon, 12-year Treasury Note is priced at 90:16 in the Wall Street Journal. What is the bond's yield to maturity?

A) 2.56%
B) 2.565%
C) 5.07%
D) 5.13%

Question 13

Which of the following statements are CORRECT? Statement I: A change in a bond's interest rate risk has a greater price impact on bonds with longer maturities.
Statement II: Government bonds have lower default risk than corporate bonds or municipal bonds.
Statement III: Trading volume is greater for corporate bonds than government bonds.

A) Statement I only
B) Statement II only
C) Statements I and II only
D) Statements II and III only

Question 14

A bond pays $60 interest payments twice a year. What is the coupon rate for the bond if the par value of the bond is $1,000?

A) 6.00%
B) 9.00%
C) 12.00%
D) 15.00%