bus 320 connect homework 5 (new version sep 2013)

Question
Rest attched in the file total 34 question

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.

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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 to2 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

check 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

%

5

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 answerto 2 decimal places. Omit the “\$” sign in your response.)

Present value

\$

(b)

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).

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)

Original price

\$

(b)

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.

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.

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)

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.

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)

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)

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]

Yield

Corporate
tax rate

Cost of debt

a.

4.0

%

10

%

%

b.

6.6

20

c.

6.0

20

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