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Valuation of Securities

The document presents various mathematical problems related to stock and bond valuation, including calculations for estimated share values based on dividends, growth rates, and required returns. It also addresses the impact of risk on stock value and provides scenarios for preferred stock and bond pricing. Key problems include intrinsic value estimation, market value calculations, and yield to maturity assessments.

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Salehin Ahammed Sisir
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5 views4 pages

Valuation of Securities

The document presents various mathematical problems related to stock and bond valuation, including calculations for estimated share values based on dividends, growth rates, and required returns. It also addresses the impact of risk on stock value and provides scenarios for preferred stock and bond pricing. Key problems include intrinsic value estimation, market value calculations, and yield to maturity assessments.

Uploaded by

Salehin Ahammed Sisir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Mathematical Problem: Stock Valuation

1. For the next three years the annual dividends of a stock are expected
to be $2.00, $2.10, and $2.20. The stock price is expected to be $20.00 at
the end of three years. If the required rate of return on the shares is 10
percent, what is the estimated value of a share?
Ans: $20.23

2. A company does not currently pay a dividend but it is expected to


begin to do so in five years (at t=5). The first dividend is expected to be
$4.00 and to be received five years from today. That dividend is
expected to grow at 6 percent into perpetuity. The required return is 10
percent. What is the estimated current intrinsic value?
Ans: $65.818

3. The current dividend is $ 5.00. Growth is expected to be 10 percent a


year for three years and then 5 percent thereafter. The required rate of
return is 8 percent. Estimate the intrinsic value.
Ans: 59.68
4. Scotto Manufacturing is a mature firm in the machine tool component
industry. The firm’s most recent common stock dividend was $2.40 per
share. Because of its maturity as well as its stable sales and earnings, the
firm’s management feels that dividends will remain at the current level
for the foreseeable future.
a. If the required return is 12%, what will be the value of Scotto’s
common stock?
b. If the firm’s risk as perceived by market participants suddenly
increases, causing the required return to rise to 20%, what will be the
common stock value?
c. Judging on the basis of your findings in parts a and b, what impact
does risk have on value? Explain.
5. Jones Design wishes to estimate the value of its outstanding preferred
stock. The preferred issue has an $80 par value and pays an annual
dividend of $6.40 per share. Similar-risk preferred stocks are currently
earning a 9.3% annual rate of return.

a. What is the market value of the outstanding preferred stock?


b. If an investor purchases the preferred stock at the value calculated in
part a, how much does she gain or lose per share if she sells the stock
when the required return on similar-risk preferred stocks has risen to
10.5%? Explain.

6. Determine the stock’s intrinsic value when the current dividend is


$2.0, investor’s required rate of return is 13%, and growth rate of
dividend is 6%. What is the stock’s value after one year from now? Find
the expected dividend yield, capital gain yield, and the total return
during the first year.

7.
Bond Valuation
1. What is the price of a $1000 bond maturing in 10 years with a 12%
coupon that is paid semiannually if the yield to maturity is 10%?

2. Assume the bond with a coupon rate of 10% and coupons are paid
annually. The par value is $5000 and the bond has 5 years to maturity.
The yield to maturity is 11%? What is the value of the bond?

3. The Salem Company bond currently sells for Tk. 955, has a 12
percent coupon interest rates and a Tk. 1,000 par value, pays interest
semiannually, and has 15years to maturity.
i. Calculate the yield to maturity (YTM) on this bond.
ii. Explain the relationship that exists between coupon interest rates
and yield to maturity and par value and market value of the bond.

4. Miller Corporation has a premium bond making semiannual


payments. The pays a coupon rate of 8 percent, has a YTM of 6 percent,
and has 13 years to maturity. The Modigliani Company has a discount
bond making semiannual payments. The bond pays a coupon rate of 6
percent, has a YTM of 8 percent, and also has 13 years to maturity. If
the interest rates remain unchanged, what do you expect the price of
these bonds to be one year from now?

5. Hacker Software has a $5000 par value, 6.2 percent coupon bonds on
the market with 9 years to maturity. The bond makes semiannual
payments and currently sell for 105 percent of par. Calculate the YTM
of the bond based on approximation method.

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