Finance - Bonds, Loans, & Debt Instruments

1. What would be the annual payment of a $50,000 loan, payable in 8 years with an interest rate of 6.5%?

2. What should a bond sell for if the coupon rate is 5.2%, it matures in 6 years and it has ayield to maturity of 8%?

3. A 25 year bond is callable in 5 years.  It has a 4.2% coupon rate payable semi-annually and a call premium of two years' interest. It has yield to maturity of 6.5%.  What is the yield to call?

4. A company borrows $150,000.  It plans to fully amortize one-half of the loans with a balloon payment at the end of the term of the loan - in 10 years.  When the loan matures, how much must the company expect to pay to the lender if the interest rate on the loan is 4.5%?

5. What is a bond's yield to maturity if the bond cost $1010, has a 6.25% coupon rate payable semi-annually and matures in 16 years?

6. What is the yield to call for a 10 year bond that is callable in 2 years, has a 5.1% coupon rate and a yield to maturity of 6.5%?  The bond's call premium is one year's interest.

7. What would be the final payment on a $750,000 loan?  The company is amortizing one-third of the loan and has a balloon payment at the end of the loan - in 8 years and interest is 3.8% (rounded)?

8. What is the yield to maturity for a zero coupon bond that matures in 15 years and costs $375?

9. What is the yield to maturity on a 15 year bond that cost $922.50 and has a coupon rate of 4.8% payable semi-annually?

Finance - Stock Valuation, Bond Valuation & Yield to Call

1. A stock that currently trades for $40 per share is expected to pay a dividend of $2 per share.  The dividend is expected to grow at a constant rate over time.  The stock has a beta of 1.2, the risk-free rate is 5% and the market risk premium is 5%. What is the stock's expected price seven years from today?  (Hint: find the growth rate using Constant Growth Model, then solve for the FV)

2. A stock is expected to have a dividend per share of $.60 at the end of the year.  The dividend is expected to grow at a constant rate of 7% per year, and the stock has a required return of 12%.  What is the expected price of the stock five years from today? 

3. The last dividend paid by Kitchen Kutlery Corp. was $1.  Kitchen's growth rate is expected to be a constant 5% for 2 years, after which dividends are expected to grow at a rate of 10% forever.  Klein's required rate of return on equity is 12%.  What is the current price of Kitchen's common stock? 

4. Wally World Corp. has a stock price of $20 per share.  The stock's year-end dividend is expected to be $2 per share.  The stock's required rate of return is 15% and the stock's dividend is expected to grow at the same constant rate forever.  What is the expected price of the stock seven years from now?

5. Choo Choo Engine Mfg. recently went public through an initial public offering.  It is expanding business quickly to take advantage of an otherwise unexploited market.  Growth for this company is expected to be 40% for the first 3 years and then is expected to slow down to a constant 15%.  The most recent dividend was $.75; in addition, the beta for the company is 1.5, the risk free rate is 8% and the market risk premium is 6%.  What is the current price of Choo Choo's stock? 

6. Waterlogged Fresh Water Distributors is not expected to pay dividends for the next 4 years.  Five years from now, the company anticipates that it will establish a dividend of $1.00 per share.  Once the dividend is established, the market expects that the dividend will grow at a constant rate of 5% per year forever.  The risk-free rate is 5%, the company's beta is 1.2 and the market risk premium is 5%.  The required rate of return on the company's stock is expected to remain constant.  What is the current stock price?

7. Happy Haddock Hatcheries expects to pay a $3.00 dividend at the end of the year. The stock's dividend is expected to grow at a rate of 10% per year until three years from now. After this time, the stock's dividend is expected to grow at a constant rate of 5% per year. The stock's required rate of return is 11%.  What is the price of the stock today?

8. Truth in Advertising Corp., a marketing firm, has common stock that currently trades at $40 per share.  The stock is expected to pay a year-end dividend of $2 per share.  The stock's dividend is expected to grow at a constant rate and its required rate of return is 9%.  What is the expected price of the stock five years from today? 

9. What is the yield to call of a bond that has a YTM of 8.5%, a coupon rate of 6.5% payable semi-annually, it matures in 8 years and is callable in 3 years.  The call premium is one year's interest.  What is the yield to call?

10. What is the cost of a new share of common stock if dividends are listed below?  The price of the stock is $28 with flotation costs of 5% of the selling price.  

Year                                       Dividend

2009                                       $1.22

2008                                       $1.17

2007                                       $1.15

2006                                       $1.13

Finance - Sample Problems - Non-Constant Growth

1. Pea Pod Cable Corp. is currently expected to grow by 25% for each of the next three years due to their superior cable television system.  However, thereafter growth is expected to level off to 6% annually.  Pea Pod just paid a dividend of $1.50.  Investors in the system have a required rate of return of 17%.  What is the value of Pea Pod stock?

2. The Slash and Burn Corp. has been experiencing some tough times lately. They predict that their growth rate will decline 10% for the next two years, then decline further by 5% in the following two years.  After that, the owners are encouraged that their new product line will enhance the bottom line and growth will expand to 16% for two years and then level off to 5% for the foreseeable future.  Investors have a required rate of return of 15% and the last dividend paid was $1.50.  What would an investor be willing to pay for S/B stock?

3. Great Gobs of Goo Corp. has fallen on hard times.  Its management expects to pay no dividends for the next two years.  However, in the third year expected dividends will be $1.00 and it is expected to grow at a rate of 3% in the 4th year, 6% in the 5th year and 10% in the 6th year and thereafter.  If the required return for Great Gobs Corp. is 20%, what would be the price of the stock today?

4. Paved Paradise Parking and Transit is experiencing a slump.  Their dividends are expected to decline at a rate of 7% for three years.  After that, with the new terminal, PPPT expects dividends to increase at a constant rate of 8% for the foreseeable future.  PPPT just paid a dividend of $4.00.  Investors in PPPT have a required return of 12%.  What would an investor be willing to pay for PPPT stock?

5. Listed below are the dividends paid for Rabbit Hutch Easter Egg Manufacturing Corporation Stock.  Although the company had a bad stretch of earnings several years ago, management believes that they are on a course that will maintain their current rate of growth.  Investors require a 20% return on this company's stock.  Rabbit Hutch stock sells for $97.50 per share.  Indicate whether or not $97.50 is a fair price for Rabbit Hutch and if not what would be a fair price?

Year                                       Dividends

2014                                       $2.50

2013                                       1.95

2012                                       1.77

2011                                       1.52

2010                                       1.57

2009                                       1.62

2008                                       1.70

6. What would be a fair price of Psycho Chihuahua Stress Management Methods, Inc.  if the dividends earned are as listed below?  Psycho stock has a rate of return of 18%.

Year                                       Dividends

2014                                       $1.75

2013                                       $1.69                    

2012                                       $1.65

2011                                       $1.53