Exam 6: How to Value Bonds and Stocks

Mortgage Instruments Inc. is expected to pay dividends of $1.03 next year. The company just paid dividends of $1. This growth rate is expected to continue. How much should be paid for Mortgage Instruments stock just after the dividend if the appropriate discount rate is 5%?

Show that a firm with earnings of $10,000 a year in perpetuity would be better off paying all earnings in dividends rather than investing 25% of its earnings (also in perpetuity) in projects earning 14% if its discount rate is 15%.

Given the opportunity to invest in one of the three bonds listed below, which would you purchase? Assume an interest rate of 7%.

In the above example, the price of the bond is

Suppose that an investor disagrees with market expectations and feels that the forward rate prevailing in the market is higher than what it should be, then the investor can make profit by:

Your firm offers a 10-year, zero coupon bond. The yield to maturity is 8.8%. What is the current market price of a $1,000 face value bond?

Angelina's made two announcements concerning its common stock today. First, the company announced that its next annual dividend has been set at $2.16 a share. Secondly, the company announced that all future dividends will increase by 4% annually. What is the maximum amount you should pay to purchase a share of Angelina's stock if your goal is to earn a 10% rate of return?

The market rate of interest on 2 year bonds is 6.25% while the rate on a one year bond maturing on one year is 5.50%. The forward rate on a one year bond one year from now is 6.5%. The liquidity premium to induce investors to hold the 2 year bond is:

Zeta Corporation has issued a $1,000 face value zero-coupon bond. Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?

Consider a bond which pays 7% semi-annually and has 8 years to maturity. The market requires an interest rate of 8% on bonds of this risk. What is this bond's price?

The discount rate can be thought of as the sum of what two parts?

In the above problem, the yield to maturity of the 2 year bond is:

A firm's value increases when it invests in projects that have:

The net present value of a growth opportunity, NPVGO, can be defined as:

If the quoted dividend yield in the paper was 2.2% and the dividend was listed as $0.72 what price is used in the calculation of dividend yield?

All else constant, a coupon bond that is selling at a premium, must have:

A pure discount bond:

Assume that you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the:

A firm is known as a 'Cash Cow':

The common stock of Eddie's Engines Corp. sells for $25.71 a share. The stock is expected to pay $1.80 per share next month when the annual dividend is distributed. Eddie's has established a pattern of increasing its dividends by 4% annually and expects to continue doing so. What is the market rate of return on this stock?