Question 1:
| The value of the bond is | 814.17 |
Question 2:
| a. The value of the Enterprise bonds if the interest is paid semiannually is | $ 849.11 |
| b. The value of the Enterprise bonds if the interest is paid annually is | $ 851.61 |
Question 3:
| The bond’s yield to maturity is | 12.41 | % |
Question 4:
| The bond’s yield to maturity if it matures in 14 years is | 8.62 | % |
| The bond’s yield to maturity if it matures in 28 years is | 8.47 | % |
| The bond’s yield to maturity if it matures in 7 years is | 8.98 | % |
Question 5:
| Question | Answer |
| a. What is the value of the bond if the markers required yield to maturity on a comparable-risk bond is 8 percent? | $ 893.25 |
| b. What is the value of the bond if the markers required yield to maturity on a comparable-risk bond increases to 11 percent? | $ 663.13 |
| c. What is the value of the bond if the market’s required yield to maturity on a comparable-risk bond decreases to 7 percent? | $ 1000.00 |
| d. The change in the value of a bond caused by changing interest rates is called interest-rate risk. Based on the answer: in parts b and c, a decrease in interest rates (the yield to maturity) will cause the value of a bond to (increase/decrease): | Increase |
| By contrast in interest rates will cause the value to (increase/decrease): | Decrease |
| Also, based on the answers in part b, if the yield to maturity (current interest rate) equals the coupon interest rate, the bond will sell at (par/face value): | Par value |
| exceeds the bond’s coupon rate, the bond will sell at a (discount/premium): | Discount |
| and is less than the bond’s coupon rate, the bond will sell at a (discount/premium): | Premium |
| e. Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 8 percent? $ 960.07 Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 11 percent? | $ 960.07 |
| f. Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 7 percent? | $ 1000.00 |
| g. From the findings in part e, we can conclude that a bondholder owning a long-term bond is exposed to (more/less) interest-rate risk than one owning a short-term bond. | More |
Question 6:
| The firm’s growth rate will be | 7.70 | % |
|---|
Question 7:
| a. If your required rate of return is 8.70 percent, the value of the stock for you is: | $ 50.64 | |
| b. You (should/should not) make the investment if your expected value of the stock is (greater/less) than the current market price because the stock would be undervalued. | Investment should not be made if the intrinsic value does not exceed the market price, thus share is over-valued. | Investment should be made if the intrinsic exceeds the market price, thus share is under-valued. |
Question 8:
| a. The firm’s growth rate will be: | 8.14% | |
| b. If the firm decides to increase its retention ratio, what will happen to the value of its common stock? An increase in the retention rate will (increase/decrease) the rate of growth in dividends, which in turn will (increase/decrease) the value of the common stock. | Increasing of the retention rate will increase the rate of growth. As a result, value of the common stock is increased. | Decreasing of retention rate will increase the rate of growth. As a result, value of the common stock is decreased. |
Question 9:
| a. The stock price using the P/E ratio valuation method is: | $ 68.57 |
| b. The stock price using the dividend discount model is: | $ 68.57 |
Question 10:
| a. The value of the preferred stock is | $61.54 | Per share |