Case - Home Products Stock And Bond Valuation

QUESTIONS -

1. Look at the 9(1/8) percent coupon bond. What is its current yield, its yield-to-first call, and its yield-to-maturity?

2. Do you think this bond will be called? Why or why not?

3. What would be the value of the 9(1/8) percent coupon bond if the time to maturity was 10 years rather than 26 years? Can you explain why your answer is correct?

4. What is the required rate of return for the preferred stock? How does this rate compare to the YTM for the HPI 9(1/8) percent bond? Is this difference what you would have expected from a risk/return stand point? Why or why not?

5. In the event of liquidation, HPI preferred stockholders are entitled to $30.50 plus accrued dividends. Does this mean that preferred stockholders will receive that amount?

6. What is the dividend yield and the expected capital gains yield for HPI common stock?

7. Given that HPI is selling for $40(5/8), what is its required rate of return? (Use the constant growth valuation model.)

8. Assume that the risk-free rate is 7 percent and that the expected return of the market is 12 percent. According to the security market line valuation model, what is the required rate of return for HPI common stock if its beta is 1.10?

9. Using the constant growth valuation model, find the present value of HPI common stock. Would you buy or sell?

10. The constant growth model is used in textbooks as a conceptual model to explain changes in stock prices. Is the model also of value for the actual valuation of stocks?

Attachment:- Case.rar