The document discusses various bond and stock valuation problems. For the first problem, the bonds have a coupon rate of 8% and yield to maturity of 8%, so the current market price is $1,000, the par value. If yield to maturity is 9%, the market price would be less than par value at $960. For Snyder Computer Chips, the stock is valued using a multistage dividend discount model to reflect a period of supernormal growth slowing to a constant growth rate. The calculated current stock price is $25.23. For preferred stock paying $5 annual dividends and selling at $60, the required rate of return is 8.33%.

1. Review
Stocks and Bonds
Valuation

2. Callaghan Motors’ bonds have 10 years remaining to
maturity. Interest is paid annually, the bonds have a
$1,000 par value, and the coupon interest rate is 8
percent. The bonds have a yield to maturity (market rate)
of 8 percent.
1- What is the current market price of these bonds?
2- If The bonds have a yield to maturity (market rate) of 9 percent
What is the current market price of these bonds?
Bond Value

3. CURRENT YIELD
 Heath Foods’ bonds have 7 years remaining
to maturity. The bonds have a face value of
$1,000 and a yield to maturity of 8 percent.
They pay interest annually and have a 9
percent coupon rate.
What is their current yield?

4. Annual coupon pmt
Current price
Solution
( )
V
.08
B =
$1,000
1
7
+
= $1,052.08+
0.08
)0(1
1
1- 7
08.
90
+
Current yield=
= 90
1052.8
=8.55%

5. BOND VALUATION
Semiannually PMT
 Nungesser Corporation has issued bonds that
have a 9 percent coupon rate, payable
semiannually.
The bonds mature in 8 years, have a face
value of $1,000, and a yield to maturity of 8.5
percent.
What is the price of the bonds?

6. Solution
( )
V
.085
B =
$1,000
1
7
+
= $1028.6+
2
0.085/2
)0(1
1
1- 16
2/085.
45
+

7. CONSTANT GROWTH
STOCK VALUATION
 Ewald Company’s current stock price is $36,
and its last dividend was $2.40. In view of
Ewald’s strong financial position and its
consequent low risk, its required rate of return is
only 12 percent.
If dividends are expected to grow at a constant
rate, g, in the future, and if rs is expected to
remain at 12 percent, what is Ewald’s expected
stock price 5 years from now?

8. Solution
g
g
gr
gD
P
s
−
+
=
−
+
=
12.
4.24.2
36
)1(ˆ 0
0
g = 5%
)1(
ˆ
6
0
5
gr
gD
P
s −
+
= 45.95
07.0
)05.1(4.2
6
==

9. SUPERNORMAL GROWTH
STOCK VALUATION
 Snyder Computer Chips Inc. is experiencing a period
of rapid growth. Earnings and dividends are expected
to grow at a rate of 15 percent during the next 2
years, at 13 percent in the third year, and at a
constant rate of 6 percent thereafter. Snyder’s last
dividend was $1.15, and the required rate of return
on the stock is 12 percent.
a. Calculate the value of the stock today.
b. Calculate P1 and P2.
c. Calculate the dividend yield and capital gains yield for
Years 1, 2, and 3.
ˆ ˆ
Important

10. Solution
a. Calculate the value of the stock today.
Steps
1. Find the PV of the dividends during the
period of nonconstant growth.
2. Find the price of the stock at the end of the
nonconstant growth period, at which point it
has become a constant growth stock, and
discount this price back to the present.
3. Add these two components to find the
intrinsic value of the stock, P0.^

11. Solution a:
0
1.1809
1.2125
1.2233
21.61
1 2 3 4rs=12%
25.23 = P0
g = 15% g =15% g = 13% g = 6%
D0 = 1.15 1.3225 1.5209 1.7186 1.8217
^
0803.32
060120
8217.1ˆ
3 $
..
$
P =
−
=
a-

12. Solution b (with the same way of Solution a)
0
1.3579
1.3701
24.2030
1 2 3 4rs=12%
26.93 = P1
g = 15% g =15% g = 13% g = 6%
D0 = 1.15 1.3225 1.5209 1.7186 1.8217
^
b-
P1= 1.3579 + 1.3701 + 24.2030 = 26.93
^
0803.32
060120
8217.1ˆ
3 $
..
$
P =
−
=

13. Solution b
0
1.5342
1 2 3 4rs=12%
g = 15% g =15% g = 13% g = 6%
D0 = 1.15 1.3225 1.5209 1.7189 1.822
3617.30
060120
822.1ˆ
3
$
..
$
P
=
−
=
b-
P2= 1.5342 + 27.1084 = 28.64
^
27.1084

14. Solution c
 c-
Year 1
Year 2
Dividend yield = = = 5.24%.
$1.3225
$25.23
D1
P0
CG Yield = 12% - 5.24% = 6.74%.
Dividend yield = = = 5.65%.
$1.5209
$26.93
D2
P1
CG Yield = 12% - 5.65% = 6.35%.

15. Solution
Year 3
Dividend yield = = = 6%.
$1.786
$28.64
D3
P2
CG Yield = 12% - 6% = 6%.
Remember that : Total yield (rs) = Dividend yield + (CG)Capital Gains Yield

16. PREFERRED STOCK VALUATION
 Fee Founders has preferred stock
outstanding which pays a dividend of $5 at
the end of each year. The preferred stock
sells for $60 a share. What is the preferred
stock’s required rate of return?
Vp =
60=
Dp
rp
5
rp
rp = 8.33%