Description
Critical Thinking: Valuation and Characteristics of Bonds and Stocks (130)
Complete the following problems:
- Problem 10-1: Bond Valuation 1
- Problem 10-2: Bond Valuation 2
- Problem 10-3: Bond Valuation 3
- Problem 10-4: Preferred Stock Valuation
- Problem 10-5: Common Stock Valuation 1
- Problem 10-6: Common Stock Valuation 2
- Problem 10-7: Cost of Trade Credit
- Problem 10-8: Cost of Commercial Paper
You can access the problem details by clicking on Valuation and Characteristics of Bonds and Stocks link below.
Complete the problems in an Excel spreadsheet or Word document. Be sure to show your work.
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Explanation & Answer
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April 19, 2017
Valuation and Characteristics of Bonds and Stocks
Problem 10-1: Bond Valuation 1
Calculate the value of a bond that will mature in 17 years and has a SAR 1,000 face value. The
annual coupon interest rate is 6 percent, and the investor's required rate of return is 8 percent.
DATA
Years
Face value
Interest
Required rate of return
17
1,000
6.0%
8.0%
Solution:
1−(1−𝑟)−𝑡
present value of interest payments=𝑐×𝑓×
in this formula interest payments are treated
𝑟
as ordinary annuities because they are paid at the end of every year.
𝑓
Present of face value of bond at maturity= (1+𝑟) or f (1+t)-t
1−(1+𝑟)−𝑡
𝑟
= PVIF
Where r is the prevailing required rate return
C is the bond coupon rate
F is the face value
T is the period or the lifetime of the bond
In this case PVIF=
1−(1+0.08)−17
0.08
= 9.122
Also PVF =0.270
The value of the bond will be the addition of the Present value of the interest payments and the
present value of the face value of the bond 𝑐×𝑓×
0.06×1000×
1−(1+0.08)−17
0.08
1−(1+𝑟)−𝑡
𝑟
+
𝑓
(1+𝑟)𝑡
1000
+ (1+8)17 =
0.06×1000×9.122 + 270.26 = SAR 817.58
Problem 10-2: Bond Valuation 2
Calculate the value of a bond that will mature in 9 years and has a SAR 1,000 face value. The
interest rate is 8 percent and is paid semi-annually, and your required rate of return is 5 percent.
What is the value of the bond if interest is pa...