bus 320 connect homework 5 (new version sep 2013)

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1 Problem 10-2 Bond value [LO3]

Applied Software has $1,000 par
value bonds outstanding at 20 percent interest. The bonds will mature in 15
years. Use.mhhe.com/connect/0073530727/Images/Appendix_B.jpg”>Appendix
Band.mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix
D.

Compute the current price of the
bonds if the present yield to maturity is(Round “PV Factor” to 3 decimal places, intermediate and
final answers to
2
decimal places. Omit the “$” sign in your response)
:

Price
of the
bond

(a) 10 percent

$

(b) 15 percent

$

(c) 12 percent

$


2.

value:
1.00
points

Problem 10-4 Bond value [LO3]

Barry’s Steroids Company has
$1,000 par value bonds outstanding at 14 percent interest. The bonds will
mature in 40 years.

If the percent yield to maturity
is 11 percent, what percent of the total bond value does the repayment of
principal represent? Use.mhhe.com/connect/0073530727/Images/Appendix_B.jpg”>Appendix
Band.mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix
D.(Round intermediate calculations to 2 decimal
places, “PV Factor” and final answer to 3 decimal places. Omit the
“%” sign in your response.)

Principal repayment

%

3.

value:
1.00
points

Problem 10-5 Bond value [LO3]

Essex Biochemical Co. has a $1,000
par value bond outstanding that pays 19 percent annual interest. The current
yield to maturity on such bonds in the market is 11 percent. Use.mhhe.com/connect/0073530727/Images/Appendix_B.jpg”>Appendix
Band.mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix
D.

Compute the price of the bonds for
these maturity dates(Round “PV
Factor” to 3 decimal places, intermediate and final answers to 2 decimal
places. Omit the “$” sign in your response)
:

Price
of the
bond

(a) 25 years

$

(b) 15 years

$

(c) 4 years

$


rev: 04_27_2012

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my workeBook
Link.mhecloud.mcgraw-hill.com/” title=”Reference Information”>r

5.

value:
1.00
points

Problem 10-11 Effect of maturity on bond price [LO3]

Refer to.mhhe.com/connect/0073530727/Images/Table%2010-2.JPG”>Table
10-2

(a)

Assume the interest rate in the
market (yield to maturity) goes down to 8 percent for the 10 percent bonds.
Using column 2, indicate what the bond price will be with a 10-year, a
20-year, and a 30-year time period.(Round
“PV Factor” to 3 decimal places, intermediate calculations and
final answers to 2 decimal places. Omit the “$” sign in your
response.)

Maturity

Bond
price

10 Years

$

20 years

30 years


(b)

Assume the interest rate in the
market (yield to maturity) goes up to 12 percent for the 10 percent
bonds. Using column 3, indicate what the bond price will be with a 10-year, a
20-year, and a 30-year period.(Round
“PV Factor” to 3 decimal places, intermediate calculations and
final answers to 2 decimal places. Omit the “$” sign in your
response.)

Maturity

Bond
price

10 Years

$

20 years

30 years


(c)

Assume the interest rate in the
market (yield to maturity) goes down to 8 percent for the 10 percent bonds.
If interest rates in the market are going down, which bond would you choose
to own?

Longest-term bond

Shortest-term bond

(d)

Assume the interest rate in the
market (yield to maturity) goes up to 12 percent for the 10 percent bonds. If
interest rates in the market are going up, which bond would you choose to
own?

Longest-term bond

Shortest-term bond

6.

value:
1.00
points

Problem 10-13 Effect of yield to maturity on bond price [LO3]

Tom Cruise Lines, Inc., issued
bonds five years ago at $1,000 per bond. These bonds had a 20-year life when
issued and the annual interest payment was then 14 percent. This return was
in line with the required returns by bondholders at that point as described
below:

Real rate of return

4

%

Inflation premium

5

Risk premium

5



Total
return

14

%






Assume that five years later the
inflation premium is only 2 percent and is appropriately reflected in the
required return (or yield to maturity) of the bonds. The bonds have 15 years
remaining until maturity.

Compute the new price of the bond.
Use.mhhe.com/connect/0073530727/Images/Appendix_B.jpg”>Appendix
Band.mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix
D.(Round
“PV Factor” to 3 decimal places, intermediate and final answer
to 2 decimal places. Omit the “$” sign in your response.)

New price

$

rev: 07-13-2011

7.

value:
2.00
points

Problem 10-14 Analyzing bond price changes [LO3]

(a)

Find the present value of 3
percent × $1,000 (or $30) for 15 years at 11 percent. The $30 is assumed to
be an annual payment. Use.mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix
D. (Round “PV Factor” to
3 decimal places, intermediate and final answer
to 2 decimal places. Omit the “$” sign
in your response.)

Present value

$

(b)

Add the answer obtained in partato 1,000.(Round “PV Factor” to 3 decimal
places, intermediate and final answer
to 2 decimal places. Omit the “$” sign in your
response.)

Present value

$

8.

value:
2.00
points

Problem 10-17 Deep discount bonds [LO3]

Lance Whittingham IV specializes
in buying deep discount bonds. These represent bonds that are trading at well
below par value. He has his eye on a bond issued by the Leisure Time
Corporation. The $1,000 par value bond pays 8 percent annual interest and has
17 years remaining to maturity. The current yield to maturity on similar
bonds is 10 percent.

(a)

What is the current price of the
bonds? Use.mhhe.com/connect/0073530727/Images/Appendix_B.jpg”>Appendix
Band.mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix
D. (Round “PV Factor” to
3 decimal places, intermediate and final answers to 2 decimal places. Omit
the “$” sign in your response.)

Current price

$

(b)

By what percent will the price of
the bonds increase between now and maturity?(Round
“PV Factor” to 3 decimal places, intermediate and final answers to
2 decimal places. Omit the “%” sign in your response.)

Price increases by

%

rev: 07-13-2011

check
my workeBook
Link.mhecloud.mcgraw-hill.com/” title=”Reference Information”>references

9.

value:
1.00
points

Problem 10-19 Approximate yield to maturity [LO3]

Bonds issued by the Tyler Food
Corporation have a par value of $1,000, are selling for $1,410, and have 20
years remaining to maturity. The annual interest payment is 20.5 percent ($205).

Compute the approximate yield to
maturity.(Do not round intermediate calculations. Round
your answer to 2 decimal places. Omit the “%” sign in your
response.)

Approximate yield to
maturity

10.

value:
2.00
points

Problem 10-22 Bond value-semiannual analysis [LO3]

You are called in as a financial
analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par
value bonds have a quoted annual interest rate of 11 percent, which is paid
semiannually. The yield to maturity on the bonds is 14 percent annual
interest. There are 20 years to maturity. Use.mhhe.com/connect/0073530727/Images/Appendix_B.jpg”>Appendix
Band.mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix
D.

(a)

Compute the price of the bonds
based on semiannual interest payments.(Round
“PV Factor” to 3 decimal places, intermediate and final answer to 2
decimal places. Omit the “$” sign in your response.)

Price of the bonds

$

(b)

With 15 years to maturity, if
yield to maturity goes down substantially to 8 percent, what will be the new
price of the bonds?(Round “PV Factor” to 3 decimal
places, intermediate and final answer to 2 decimal places. Omit the
“$” sign in your response.)

New price

$

11.

value:
1.00
points

Problem 10-24 Preferred stock value [LO4]

Bedford Mattress Company issued
preferred stock many years ago. It carries a fixed dividend of $11 per share.
With the passage of time, yields have gone down from the original 10 percent
to 9 percent (yield is the same as required rate of return).

(a)

What was the original issue price?(Round your answer to 2 decimal places.Omit the “$” sign in your response.)

Original price

$

(b)

What is the current value of this
preferred stock?(Round your answer to 2 decimal
places.
Omit the “$”
sign in your response.)

Current value

$

12.

value:
1.00
points

Problem 10-26 Preferred stock rate of return [LO4]

Grant Hillside Homes, Inc., has
preferred stock outstanding that pays an annual dividend of $10.30. Its price
is $167.

What is the required rate of
return (yield) on the preferred stock?(Round
your answer to 2 decimal places. Omit the “%” sign in your
response.)

Rate of return

%

13.

value:
1.00
points

Problem 10-28 Common stock value [LO5]

Laser Optics will pay a common
stock dividend of $3.20 at the end of the year (D1). The required
rate of return on common stock (Ke) is 20 percent. The firm has a
constant growth rate (g) of 10 percent.

Compute the current price of the
stock (P0).(Round
your answer to 2 decimal places.
Omit the “$” sign in your response.)

Current price

$

14.

value:
2.00
points

Problem 10-29 Common stock value under different market
conditions [LO5]

Ecology Labs, Inc., will pay a
dividend of $6.80 per share in the next 12 months (D1). The
required rate of return (Ke) is 15 percent and the constant growth
rate is 5 percent.(Each question is independent of the others.)

(a)

Compute the price of Ecology Labs’
common stock.(Round your intermediate and final answer to 2
decimal places. Omit the “$” sign in your response.)

Price

$

(b)

Assume Ke, the required
rate of return, goes up to 20 percent; what will be the new price?(Round your intermediate and final answer to 2
decimal places. Omit the “$” sign in your response.)

New price

$

(c)

Assume the growth rate (g) goes up
to 7 percent; what will be the new price? Kegoes back to its
original value of 15 percent.(Round your intermediate and final answer to 2
decimal places. Omit the “$” sign in your response.)

New price

$

(d)

Assume D1is $7.50; what will be the new price? Assume Keis
at its original value of 15 percent and g goes back to its original value of
5 percent.(Round your intermediate and final answer to 2
decimal places. Omit the “$” sign in your response.)

New price

$

15.

value:
2.00
points

Problem 10-31 Common stock value based on determining growth
rate [LO5]

Justin Cement Company had the
following pattern of earnings per share over the last five years:

Year

Earnings
per share

2006

$

10.00

2007

10.50

2008

11.03

2009

11.58

2010

12.16


The earnings per share have grown
at a constant rate (on a rounded basis) and is expected to do so in the
future. Dividends represent 40 percent of earnings.

(a)

Project earnings and dividends for
the next year (2011).(Round yourintermediate and final answers to 2 decimal places. Omit the
“$” sign in your response.)

2011

Earnings

$

Dividend

$


(b)

If the required rate of return (Ke)
is 13 percent, what is the anticipated stock price (P0) at the
beginning of 2011?(Round yourintermediate and final answers to 2 decimal places. Omit the
“$” sign in your response.)

Anticipated stock
price

$

check
my workeBook
Link.mhecloud.mcgraw-hill.com/” title=”Reference Information”>references

16.

value:
1.00
points

Problem 10-32 Common stock required rate of return [LO5]

A firm pays a $9.80 dividend at
the end of year one (D1), has a stock price of $137, and a
constant growth rate (g) of 5 percent.

Compute the required rate of
return (Ke).(Round yourintermediateand final answerto 2 decimal places. Omit the “%” sign in your
response.)

Rate of return

%

17.

value:
4.00
points

Problem 10-35 Common stock value based on PV calculations [LO5]

Beasley Ball Bearings paid a $4
dividend last year. The dividend is expected to grow at a constant rate of 4
percent over the next four years. The required rate of return is 16 percent
(this will also serve as the discount rate in this problem). Use.mhhe.com/connect/0073530727/Images/Appendix_B.jpg”>Appendix
B.

(a)

Compute the anticipated value of
the dividends for the next four years.(Round your intermediate calculations and final answers to 3
decimal places. Omit the “$” sign in your response.)

Anticipated
value

D1

$

D2

$

D3

$

D4

$


(b)

Calculate the present value of
each of the anticipated dividends at a discount rate of 16 percent.(Round “PV Factor”, intermediate calculations and
final answers to 3 decimal places. Omit the “$” sign in your
response.)

PV
of
dividends

D1

$

D2

D3

D4


Total

$




(c)

Compute the price of the stock at
the end of the fourth year (P4).(Round “PV Factor”, intermediate calculations and final
answer to 3 decimal places. Omit the “$” sign in your response.)

Price of the stock

$

(d)

Calculate the present value of the
year 4 stock price at a discount rate of 16 percent.(Round “PV Factor”, intermediate
calculations and final answer to 3 decimal places. Omit the “$”
sign in your response.)

Price of the stock
(discounted)

$

(e)

Compute the current value of the
stock.(Round
“PV Factor”, intermediate calculations and final answer to 3
decimal places. Omit the “$” sign in your response.)

Current value

$

(f)

Use formula given below to show
that it will provide approximately the same answer as parte.(Omit the “$” sign in your response.)

P0

=

D1

Ke? g

Current value

$

(g)

If current EPS is equal to $5.329
and the P/E ratio is 1.2 times higher than the industry average of 6, what
would the stock price be?(Round your intermediate calculations and final
answers to 2 decimal places. Omit the “$” sign in your response.)

Stock price

$

(h)

By what dollar amount is the stock
price in partgdifferent from the stock price in partf?(Input the amount as a positive value. Round
intermediate calculations and final answer to 2 decimal places. Omit the
“$” sign in your response.)

Amount

$

(i)

In regard to the stock price in
partf, indicate
which direction it would move if

(1)

D1increases

(2)

Keincreases

(3)

g increases


18.

value:
1.00
points

Problem 11-2 Cost of capital [LO2]

Speedy Delivery Systems can buy a
piece of equipment that should provide an 6 percent return and can be
financed at 3 percent with debt. The CEO likes earning more than the cost of
debt, and he thinks this would be a good deal. The firm can also buy a
machine that would yield a 13 percent return but would cost 15 percent to
finance through common equity. Earning less than the cost of equity sounds
bad to the CEO. Assume debt and common equity each represent 50 percent of
the firm’s capital structure.

(a)

Compute the weighted average cost
of capital.(Round your intermediate and final answers to 1
decimal place. Omit the “%” sign in your response.)

Weighted average cost
of capital

%

(b)

Which project(s) should be
accepted?

Piece of equipment should be
financed.

New machine should be financed.

19.

value:
1.00
points

Problem 11-3 Effect of discount rate [LO2]

A brilliant young scientist is
killed in a plane crash. It was anticipated that he could have earned
$260,000 a year for the next 25 years. The attorney for the plaintiff’s
estate argues that the lost income should be discounted back to the present
at 5 percent. The lawyer for the defendant’s insurance company argues for a
discount rate of 10 percent.

What is the difference between the
present value of the settlement at 5 percent and 10 percent? Compute each one
separately.Use.mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix
D.(Round “PV Factor” to 3 decimal
places. Round your answers to the nearest dollar amount. Omit the
“$” sign in your response)

Present
value

PV at 5% rate

$

PV at 10% rate



Difference

$






20.

value:
1.00
points

Problem 11-5 Aftertax cost of debt [LO3]

Calculate the aftertax cost of
debt under each of the following conditions.(Round
your answers to 2 decimal places. Omit the “%” sign in your
response.)

Yield

Corporate
tax rate

Cost
of debt

a.

4.0

%

10

%

%

b.

6.6

20

c.

6.0

20


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