three basic bond valuation Complex Systems has an outstanding issue( answer attached)

q.xls

4

 

      

 A

8%

 B

515

 C

1014

 D

89

 E

820

     

Common stock value—Constant growth Use the constant-growth model (Gordon
model) to find the value of each firm shown in the following table.
Firm	Dividend expected next year	Dividend growth rate	Required return
$1.20	13%
4.00
0.65
6.00
2.25

2

>2 Questions

oth should provide benefits over a

-year period, and

,000

. Management has constructed the table

etermine the range for the rate of return for each of the two cameras.

amera R

mount

Amount Probability

$4,000

$4,000 1.00

%

%

25%

0

%

0.25

%

0.25

2

Probability Rate of return Probability

)

10%

10

15

20 0.05 20 0.10
30 0.10 25

0.15 30 0.20

35 0.15

50 0.15 40 0.10

0.10 45 0.10

0.05 50 0.05

0

0.04

0.01

1	Risk and probability Micro-Pub, Inc., is considering the purchase of one of two
microfilm cameras, R and S.	B		10
each requires an initial investment of		$	4
of estimates of rates of return and probabilities for pessimistic, most
likely, and optimistic results.
a.	D
b. Determine the expected value of return for each camera.
c. Purchase of which camera is riskier? Why?
	C	Camera S
		A				Probability
Initial Investment		1.00
Annual rate of return
Pessimistic				20			0.	2		5			15		0.20
Most Likely		25%	0.		50	0.55
Optimistic				3		35
Assessing return and risk Swift Manufacturing must choose between two asset purchases.
The annual rate of return and the related probabilities given in the following
table summarize the firm’s analysis to this point.
Project 257	Project 432
	Rate of return
(-	10%		0.01				0.05
	0.04						0.10
			0.15
	40
	45	0.30
60
70
		8
100
a. For each project, compute:
(1) The range of possible rates of return.
(2) The expected value of return.
(3) The standard deviation of the returns.
(4) The coefficient of variation of the returns.
b. Construct a bar chart of each distribution of rates of return.
c. Which project would you consider less risky? Why?

1 Question

3

Basic bond valuation Complex Systems has an outstanding issue of $1,000-parvalue

bonds with a 12% coupon interest rate. The issue pays interest annually and

has 16 years remaining to its maturity date.

a. If bonds of similar risk are currently earning a 10% rate of return, how much

should the Complex Systems bond sell for today?

b. Describe the two possible reasons why the rate on similar-risk bonds is below the

coupon interest rate on the Complex Systems bond.

c. If the required return were at 12% instead of 10%, what would the current value

of Complex Systems’ bond be? Contrast this finding with your findings in part a

and discuss.

Another 2 Questions

4

A

B

5 15

C

10

D

8

8 20

5

Common stock value—Constant growth Use the constant-growth model (Gordon
model) to find the value of each firm shown in the following table.
Firm	Dividend expected next year	Dividend growth rate	Required return
$1.20	8%	13%
4.00
0.65	14
6.00	9
E	2.25
Common stock value—Variable growth Newman Manufacturing is considering
a cash purchase of the stock of Grips Tool. During the year just completed, Grips
earned $4.25 per share and paid cash dividends of $2.55 per share (D0=$2.55).
Grips’ earnings and dividends are expected to grow at 25% per year for the next
3 years, after which they are expected to grow at 10% per year to infinity. What is
the maximum price per share that Newman should pay for Grips if it has a required
return of 15% on investments with risk characteristics similar to those of Grips?