Grand Canyon Chapters 6 & 7 Valuation of Securities Problem Set

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pneiny

Business Finance

Grand Canyon University

Description

Financial Tools problem set

Details:

Complete the following problems from Chapters 6 and 7 in Principles of Managerial Finance:

  1. Bond Valuation: P6-13; P6-17; P6-18; P6-19; P6-22
  2. Stock Valuation: P7-6; P7-8; P7-9; P7-14; P7-15; P7-16

Use the Chapters 6-7 Excel resource (if needed) to complete the problem-set assignment in this topic.

Please show all work for each problem.

4 months ago

problem_setweek4.docx

1. Principles of Managerial FinanceRead Chapters 13-16 in Principles of Managerial Finance.http://gcumedia.com/digital-resources/pearson/2014/principles-of-managerial-finance_ebook_14e.php

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Explanation & Answer

There you go buddy...

Asset

End of
Amount
the Year

1

A

2
3

B

1
through
infinity

Asset C
$2.000

2
3
4
5

E

N= 3, I =
18%,
$5.000
Asset A
PMT =
$5,000 $10.871.36
$5.000
PV=5000/(1+18%)1+5000/(1+18%)2+50
$5.000
Asset B
PV=Annual Cash Flow/required return=3
$300 1 / 0.15

1

C

D

Present
Value of
Cash
Flows

1
through
5

N = 5, I
= 16,
0
FV =
$35,000 #######
0
0
0
$35.000

$1.500
6

8500

1
2
3
4
5
6

$2.000
3000
5000
7000
4000
1000

N = 6, I
= 12

#######

PMT =
$1,500
FV =
$7,000

14% #######

PV=0/(1+16%)1 +0/(1+16%)2+0/(1+16%

Asset D

PV=1500/(1+12%)1+1500/(1+12%)2+15
Asset E

PV=2000/(1+14%)1+3000/(1+14%)2+50

/(1+12%)1+1500/(1+12%)2+1500/(1+12%)3+1500/(1+12%)4+1500/(1+12%)5+8500/(1+12%)6=$9713.53

/(1+14%)1+3000/(1+14%)2+5000/(1+14%)3+7000/(1+14%)4+4000/(1+14%)5+1000/(1+14%)6=$14115.27

Mid Land Utilities
Part A
Coupon rate
Face value (considering 1 bond
as minimumtrading)
Semi annual coupons
Number of years
Required rate of return

11,00%
$1.000
$110,00
12

Price of a bond
((c/i)*(1-1/(1+i)^n))+(fv/(1+i)^n)
8% $
1.371,30
11% $
1.000,00
15% $
733,39

Part B

Yield curve

$1.500,00
$1.000,00
$500,00

Price of a bond

$1

2

3

Part C

We can observe from thae data that if coupon rate on bond is higher than expected return the market price of
bond is lower than its par value, On the other hand if expected return is lower than market price of bond is
higher than its value. Market price will be equal to the par value if coupon rate is equal to the return expected
by investor.
Part D
The possible reason for difference betwwen cuopon rate and expected rate of return is that bond is rarely sold
at its par value because of flutuations in price of a bond due based on its demand and supply, if the demand of
bond decreases the price of bond will fall below its par value and its yield will increase because now investurs
have to payless to achieve same amount of return. Thus expected return of investors will also increase. On the
other hand if demand of bond increases investors are willing to pay extra fora bond thus incrasing price of a
bond. Thius inturn reduces expected return of investor.

Bond
A
B
C
D
E

Par Value (FV) Coupon Rate coupon paid (pmt) Years to Maturity (n-per)
$
1.000,00
9,...

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