Security Valuation – Practice Problems
1. One year ago, you purchased a 6 percent coupon bond, paying semi-annual
interest, for $920. This bond now has five years remaining until maturity. Today
the yield to maturity on this bond is 6.20 percent. What is the percentage change
in the price of your bond?
2. Daniel’s Sports Store needs to raise $10 million for an expansion project. The
firm wants to raise this money by selling zero coupon bonds with a par value of
$1,000 that mature in 25 years. The market yield on similar bonds is 6.5 percent.
How many bonds must Daniel’s Sports Store sell to raise the money it needs?
3. The yield on a corporate bond is 7.5 percent, while the yield on a municipal bond
with the same risk is 5.4 percent. At what tax rate would you be indifferent
between the two bonds?
4. The following bond quote was taken from yahoo.com:
Type Issue
Price
Corp Pfizer
96.09
Coupon(%)
4.500
Maturity
YTM(%)
20-Mar-2014
???
Current
Yield(%)
???
Fitch Ratings
Callable
AAA
No
a. What is the current yield on this bond?
b. Calculate the yield-to-maturity for this bond. (This quote was dated March 2008)
5. AJ Thompson’s preferred stock sells for $29.41 a share and pays an annual
dividend of $2.50 per share. What rate of return would you expect to receive if
you bought these preferred shares?
6. High Class Jewelry is a specialty company in the fine jewelry market. Based on
its latest projections, the company expects to increase its annual dividend by 25
percent for the next two years. After that, the company plans to maintain a
constant dividend growth rate of 6 percent per year. The last dividend paid was
$2.20 per share. What is the current value of this stock if the required rate of
return is 15 percent?
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7. The following information about IBM Corporation stock was obtained from
Yahoo.com:
Closing Price:
$114.29
P/E Ratio:
16.22
Div Yld
1.4%
52-week Range: 92.10 – 121.46
Shares outstanding
1.38 billion
a. What is the quarterly dividend per share paid by IBM?
b. What is IBM’s market capitalization?
8. Davis and Sons just paid an annual dividend of $2.20. The company has
increased their dividend by 5 percent a year for the past twenty years and expects
to continue doing so in the future. What will a share of this stock be worth five
years from now, if the required return is 12 percent?
9. Miller Brothers needs to raise $25 million for an expansion project. They propose
raising this money by selling zero coupon bonds with a par value of $1,000, that
mature in 20 years. The market yield on similar bonds is 6.8 percent. How many
bonds must Miller Brothers see to raise the money they need?
10. Use the following WSJ bond quotation to answer the questions below:
Last
Last Est
Company (Ticker)
Coupon Maturity
Price Yield Spread
Cisco Systems (CSCO) 5.500
Mar 22, 2018 98.372
?
86
a. Assuming a par value of $1,000, how much would you pay to buy one
bond?
b. This bond pays semi-annual coupons. What is the amount of each coupon
payment? Assume a par value of $1,000.
c. What is the current yield on this bond?
d. Calculate the “Last Yield” (yield-to-maturity) for this bond (quotation
dated March 2006).
2
11. Use the following WSJ stock quotation to answer the questions below:
52-WEEK
YLD
VOL
NET
HI LO
STOCK (DIV)
%
PE 100s
CLOSE
CHG
35.50 24.32 BellSouth 1.16
?
19 95203
34.60
-0.31
a. What price did the stock close at on the previous trading day?
b. What is the “YLD %” (dividend yield) of this stock?
c. Based on the quotation, what were the stock’s earnings per share (EPS)?
d. If you own 200 shares of this stock, what was the amount of the last quarterly
dividend check that you received?
12. Suppose the Pocket Book Company is expected to pay a dividend of $3.10 per
share next year. Dividends are expected to grow at a rate of 30% for the
following 2 years and then at 5% per year indefinitely. If the required return is
15%, what is the value of a share of Pocket Book Company?
13. You own a 9 percent coupon bond, paying semi-annual interest, which currently
has a 9 percent yield to maturity. The bond has 18 years to maturity. If the
market rate of interest unexpectedly rises to 11 percent, what is the percentage
change in the price of the bond?
14. The yield on a corporate bond is 8 percent, while the yield on a municipal bond
with the same risk is 5.5 percent. Which bond should you invest in, if your
marginal tax rate is 35 percent? Show your work.
15. The Biltmore Construction Company just issued 300,000 zero coupon bonds.
These bonds mature in 25 years, have a par value of $1,000 and have a yield to
maturity of 7.50 percent. What is the total amount of money the company raised
from issuing these bonds?
16. The following bond quote was taken from yahoo.com:
Type
Issue
Price Coupon(%)
Corp COCA COLA 112.80
7.250
Maturity
20-Mar-2017
YTM(%)
???
Current
Yield(%)
???
Fitch Ratings Callable
A
c. What is the current yield on this bond?
d. Calculate the yield-to-maturity for this bond (quotation dated March 2007).
3
No
17. Joline Enterprises is expected to pay an annual dividend of $1.60 per share next
year. The required return is 11 percent and the dividends are expected to grow at
a constant rate of 6 percent. What is the expected value of this stock seven years
from now?
18. Lucky K Enterprises is growing by leaps and bounds. The company expects to
pay dividends of $1.60, $2.80 and $3.70 over the next three years, respectively.
After that, the dividend is projected to increase by 8 percent annually. What is the
value of the stock today, if the required rate of return on the stock is 12 percent?
19. The following information about IBM Corporation was obtained from
Yahoo.com:
Closing Price:
$93.45
P/E Ratio:
15.29
Dividend
$1.20
52-week Range: 72.73 – 100.90
Shares outstanding
1.51 billion
a. Calculate the earnings per share for IBM.
b. What is IBM’s market capitalization?
c. Determine IBM’s dividend yield.
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