Nicole Kyle A.

Labbao Security Analysis

4FM4, Sat 7:00-10:00 Prof. Cesar Cruel

PROBLEM
7-20 (BOND VALUATION)

Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate
bonds. His financial planner has suggested the following bonds:

Bond A has a 7% annual coupon, matures in 12 years, and has a $1,000 face value.

Bond B has a 9% annual coupon, matures in 12 years, and has a $1,000 face value.

Bond C has an 11% annual coupon, matures in 12 years, and has a $1,000 face value.

Each bond has a yield to maturity of 9%.

a. Before calculating the prices of the bonds, indicate whether each bond is trading at a
premium, at a discount, or at par.

Answer:

Bond A is selling at a discount because its coupon rate (7%) is less that the going interest rate
(YTM=9%)

Bond B is selling at par because its coupon rate (9%) is equal to the going interest rate
(YTM=9%)

Bond C is selling at a premium because its coupon rate (11%) is greater that the going interest
rate (YTM=9%)

Work parts b through e with a spreadsheet. You can also work these parts with a calculator to
check your spreadsheet answers if you aren't confident of your spreadsheet solution. You must
then go on to work part g with the spreadsheet

b. Calculate the price of each of the three bonds.

Nicole Kyle A. Labbao Security Analysis
4FM4, Sat 7:00-10:00 Prof. Cesar Cruel

Answer:

Basic Input Data: Bond A Bond B Bond C

Years to Maturity: 12 12 12

Periods per year: 1 1 1

Periods to maturity: 12 12 12

Coupon rate: 7% 9% 11%

Par value: $1,000 $1,000 $1,000

Periodic payment: $70 $90 $110

Yield to maturity 9% 9% 9%
$856.79 $1,000.00 $1,143.21
PROBLEM
9-3 CONSTANT GROWTH VALUATION
Harrison Clothiers' stock currently sells for $20 a share. It just paid a dividend of $1.00 a share.
(That is, Do= $1.00). That dividend is expected to grow at a constant rate of 6% a year. What
stock price is expected 1 year from now? What is the required rate of return?

Answer:

9-8 PREFERRED STOCK VALUATION

Nicole Kyle A. Labbao Security Analysis
4FM4, Sat 7:00-10:00 Prof. Cesar Cruel

Ezzell Corporation issued perpetual preferred stock with a 10% annual dividend. The stock
currently yields 8%, and its par value is $100.

a. What is the stock's value?

Answer:

Preferred Stock Value = Annual Dividend / Yield = 10%*100/8% = $125

b. Suppose interest rates rise and pull the preferred stock's yield up to 12%. What is its new
market value?

Answer:

Preferred Stock Value = Annual Dividend / Yield = 10%*100/12% = $83.33