P6-13) Valuation of assets Using the information provided in the following table, find thevalue of each asset.Cash flowAsset End of year Amount Appropriate required returnA 1 $ 5,000 18%2 5,0003 5,000B 1 through ` $ 300 15%C 1 $ 0 16%2 03 04 05 35,000D 1 through 5 $ 1,500 12%6 8,500E 1 $ 2,000 14%2 3,0003 5,0004 7,0005 4,0006 1,000 P6-17) Bond value and changing required returns Midland Utilities has outstanding a bondissue that will mature to its $1,000 par value in 12 years. The bond has a couponinterest rate of 11% and pays interest annually.a. Find the value of the bond if the required return is (1) 11%, (2) 15%, and(3) 8%.b. Plot your findings in part a on a set of “required return (x axis)–market value ofbond (y axis)” axes.c. Use your findings in parts a and b to discuss the relationship between the couponinterest rate on a bond and the required return and the market value of the bondrelative to its par value.d. What two possible reasons could cause the required return to differ from thecoupon interest rate? P6-18) Bond value and time: Constant required returns Pecos Manufacturing has just issueda 15-year, 12% coupon interest rate, $1,000-par bond that pays interest annually.The required return is currently 14%, and the company is certain it will remainat 14% until the bond matures in 15 years.a. Assuming that the required return does remain at 14% until maturity, find thevalue of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3years, and (6) 1 year to maturity.b. Plot your findings on a set of “time to maturity (x axis)–market value of bond(y axis)” axes constructed similarly to Figure 6.5 on page 252.c. All else remaining the same, when the required return differs from the couponinterest rate and is assumed to be constant to maturity, what happens to thebond value as time moves toward maturity? Explain in light of the graph inpart b. P6-19) Bond value and time: Changing required returns Lynn Parsons is considering investingin either of two outstanding bonds. The bonds both have $1,000 par values and11% coupon interest rates and pay annual interest. Bond A has exactly 5 years tomaturity, and bond B has 15 years to maturity.a. Calculate the value of bond A if the required return is (1) 8%, (2) 11%, and(3) 14%.b. Calculate the value of bond B if the required return is (1) 8%, (2) 11%, and(3) 14%. c. From your findings in parts a and b, complete the following table, and discussthe relationship between time to maturity and changing required returns.Required return Value of bond A Value of bond B8% ? ?11 ? ?14 ? ?Bond Coupon interest rate Yield to maturity PriceA 6% 10%B 8 8C 9 7D 7 9E 12 10Bond Par value Coupon interest rate Years to maturity Current valueA $1,000 9% 8 $ 820B 1,000 12 16 1,000C 500 12 12 560D 1,000 15 10 1,120E 1,000 5 3 900d. If Lynn wanted to minimize interest rate risk, which bond should she purchase?Why? P6-22) Yield to maturity Each of the bonds shown in the following table pays interest annually.LG 6LG 6a. Calculate the yield to maturity (YTM) for each bond.b. What relationship exists between the coupon interest rate and yield to maturityand the par value and market value of a bond? Explain. P7-6) Common stock value: Zero growth Kelsey Drums, Inc., is a well-establishedsupplier of fine percussion instruments to orchestras all over the United States.The company’s class A common stock has paid a dividend of $5.00 per share peryear for the last 15 years. Management expects to continue to pay at that amountfor the foreseeable future. Sally Talbot purchased 100 shares of Kelsey class Acommon 10 years ago at a time when the required rate of return for the stock was16%. She wants to sell her shares today. The current required rate of return for thestock is 12%. How much capital gain or loss will Sally have on her shares? P7-8) Common stock value: Constant growth Use the constant-growth model (Gordongrowth model) to find the value of each firm shown in the following table.Firm Dividend expected next year Dividend growth rate Required returnA $1.20 8% 13%B 4.00 5 15C 0.65 10 14D 6.00 8 9E 2.25 8 20 P7-9) Common stock value: Constant growth McCracken Roofing, Inc., common stockpaid a dividend of $1.20 per share last year. The company expects earnings and dividendsto grow at a rate of 5% per year for the foreseeable future.a. What required rate of return for this stock would result in a price per share of $28?b. If McCracken expects both earnings and dividends to grow at an annual rate of10%, what required rate of return would result in a price per share of $28? P7-14) Common stock value: Variable growth Lawrence Industries’ most recent annualdividend was $1.80 per share (D0 = $1.80), and the firm’s required return is 11%.Find the market value of Lawrence’s shares when:a. Dividends are expected to grow at 8% annually for 3 years, followed by a 5%constant annual growth rate in years 4 to infinity.b. Dividends are expected to grow at 8% annually for 3 years, followed by a 0%constant annual growth rate in years 4 to infinity.c. Dividends are expected to grow at 8% annually for 3 years, followed by a 10%constant annual growth rate in years 4 to infinity. P7-15) Common stock value: All growth models You are evaluating the potential purchaseof a small business currently generating $42,500 of after-tax cash flow(D0 = $42,500). On the basis of a review of similar-risk investment opportunities,you must earn an 18% rate of return on the proposed purchase. Because you are relativelyuncertain about future cash flows, you decide to estimate the firm’s value usingseveral possible assumptions about the growth rate of cash flows.a. What is the firm’s value if cash flows are expected to grow at an annual rate of0% from now to infinity?b. What is the firm’s value if cash flows are expected to grow at a constant annualrate of 7% from now to infinity?c. What is the firm’s value if cash flows are expected to grow at an annual rate of12% for the first 2 years, followed by a constant annual rate of 7% from year 3to infinity? P7-16) Free cash flow valuation Nabor Industries is considering going public but is unsureof a fair offering price for the company. Before hiring an investment banker to assistin making the public offering, managers at Nabor have decided to make their ownestimate of the firm’s common stock value. The firm’s CFO has gathered data forperforming the valuation using the free cash flow valuation model. The firm’s weighted average cost of capital is 11%, and it has $1,500,000 of debtat market value and $400,000 of preferred stock at its assumed market value. The estimatedfree cash flows over the next 5 years, 2016 through 2020, are given below.Beyond 2020 to infinity, the firm expects its free cash flow to grow by 3% annually.Year (t) Free cash flow (FCFt)2016 $200,0002017 250,0002018 310,0002019 350,0002020 390,000a. Estimate the value of Nabor Industries’ entire company by using the free cashflow valuation model.b. Use your finding in part a, along with the data provided above, to find Nabor Industries’common stock value.c. If the firm plans to issue 200,000 shares of common stock, what is its estimatedvalue per share?
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