ECN604: Business Finance Workshop 2
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ECN604: Business Finance
Workshop 2
Bond and Share Valuation
Essay Questions
1) Assume that you have a 30-year Treasury bond and a 30-year BB-rated corporate bond. Which has greater interest rate risk, and why? Which has greater default risk, and why?
2) Explain the conditions that would need to exist for the term structure of the interest rates to be downward sloping.
3) In the context of the dividend growth model, is it true that the growth rate in dividends and the growth rate in the share price are identical?
Multiple-Choice Questions
1. Bryceton plc has bonds on the market with 13 years to maturity, a yield-to-maturity of 9.2 percent, a face value of 100 and a current price of 89.509. The bonds make semi-annual payments. What is the coupon rate?
A. 7.80 percent
B. 8.00 percent
C. 8.25 percent
D. 8.40 percent
E. 8.65 percent
2. Dexter Mills issued 20-year bonds a year ago at a coupon rate of 11.4 percent. The bonds make semi-annual payments. The yield-to-maturity on these bonds is 9.2 percent. What is the current bond price if the face value is 1,000?
A. 985.55
B. 991.90
C. 1,192.16
D. 1,195.84
E. 1,198.00
3.The zero coupon bonds of D&L Movers have a market price of 31.924, a face value of 100, and a yield to maturity of 9.17 percent. How many years is it until these bonds mature?
A. 11.92 years
B. 12.28 years
C. 12.73 years
D. 13.01 years
E. 13.47 years
4. You have won a contest and will receive €2,500 a year in real terms for the next 3 years. Each payment will be received at the end of the period with the first payment occurring one year from today. The relevant nominal discount rate is 6.3 percent and the inflation rate is 4.5 percent. What are your winnings worth today?
A. €7,249
B. €7,367
C. €7,401
D. €7,500
E. €7,838
5. Jen's Fashions is growing quickly. Dividends are expected to grow at a 22 percent per year over the next 3 years, with the growth rate falling off to a constant 8 percent thereafter. The required return is 12 percent and the company just paid a £3.80 annual dividend. What is the current share price?
A. £128.96
B. £132.61
C. £146.17
D. £148.87
E. £152.20
6. Upper Crust Bakers just paid an annual dividend of 2.80 a share and is expected to increase that amount by 4 percent per year. If you are planning to buy 1,000 shares of this equity next year, how much should you expect to pay per share if the market rate of return for this type of security is 11.50 percent at the time of your purchase?
A. 37.33
B. 38.16
C. 38.83
D. 40.38
E. 42.00
7. Crystal Glass’s future dividends are projected at €3.80, €4.10, and €4.25 over the next 3 years, respectively. Beginning 4 years from now, the dividend is expected to increase by 3.25 percent annually. What is one share of this equity worth to you if you require a 12.5 percent rate of return on similar investments?
A. €42.92
B. €43.40
C. €45.12
D. €45.88
E. €46.50
2023-03-23