Kent Institute Australia
FINM202 Financial Management T123
Week 4 <HW2> Tutorial Questions
Bond Valuation:
Question 1_
A 5-year bond pays interest annually. Its par value is $1,000 and its coupon rate equals 9%.
If the market’s required return on the bond is 8 per cent, what is the bond’s market price?
A:
xxx
Question 2
Syd-Mel Ltd has issued 6-year bonds that pay $35 in interest twice each year. The face value
of these bonds is $1,000 and they offer a yield to maturity of 5.5 %. How much are the
bonds worth?
A.
xxx
Question 3
Investors face a tax rate of 30% on interest paid by corporate bonds. If tax-free bonds
currently offer yields of 6 %, what yield would equally risky corporate bonds need to offer to
be competitive?
A.
xxx
Share Valuation:
Question 4
S Ltd has outstanding an issue of preferred equity with a par value of $100. It pays an annual
dividend equal to 9% of par value. If the required return on S Ltd.’s preferred equity is 7 %,
and if S Ltd pays its next dividend in one year, what is the market price of the preferred
equity today?
A.
xxx
Question 5
AMC’s preferred equity pays a dividend of $10 each year. If the shares sell for $60 each and
the next dividend will be paid in one year, what return do investors require on AMC
preferred equity?
A. XX
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Question 6
SydMel Ltd has issued preferred equity that offers investors a 10 % annual return. A share
currently sells for $80, and the next dividend will be paid in one year. How much is the
dividend?
A.
xx
Question 7
Gail Dribble is analysing the shares of Petscan Radiology. Petscan’s equity pays a dividend
once each year, and it just distributed this year’s $0.85 dividend. The market price of the
share is $12.14. Gail estimates that Petscan will increase its dividends by 7 % per year
forever. After contemplating the risk of Petscan equity, Gail is willing to hold the shares only
if they provide an annual expected return of at least 13 %. Should she buy Petscan shares or
not?
A.
xx
Question 8
Sydney-Melbourne (Syd-Mel) operates a chain of weight-loss centres for carb lovers. Its
services have been in great demand in recent years and its profits have soared. Syd-Mel
recently paid an annual dividend of $2.70 per share. Investors expect that the company will
increase the dividend by 25% in each of the next three years, and after that they anticipate
that dividends will grow by about 6% per year. If the market requires an 11% return on SydMel equity, what should the share sell for today?
A.
Xxxx
=== End of HW2 – Week 4 Homework questions ===
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