1. MGT 326 Spring 2015 Test 2 Problem Solutions
4. A $10,000 face value Diamond Jim’s Corporation bond matures 1 October It has a % coupon rate and pays coupons semiannually. Its YTM as of 14 April 2015 was %. What is this bond’s retail price as of 14 April 2015?
SDT =
CPN = 5.785
RDT =
YLD = 5.42
PRI = %; VB = 100 x = %; = $10,142.78
7. At the beginning of the year a $1,000 face value bond paying a coupon rate of % APR with semiannual payments and 16.5 years maturity was selling at par (excluding fees and transaction costs). At the end of the year the bond's YTM was %. What is the bond’s total yield for the year?
Bond Total Yield = EARCoupon + Capital Gains Yield
EARCPN = NOM=7.82, C/Y=2; EFF = %
VB,0 = $1,000
VB,1: T=15.5, m=2; n = 31; PMT = $1,000(0.0782/2) = $39.10
P/Y=2, N=31, I/Y=8.24, PMT=39.1, FV=1000; CPT, PV: VB,1 = $
Cap Gain Yield = ($ $1,000)/$1,000 = %
Total Yield = % % = %
9. What is the fair market value of a $1,000 face value bond that pays annual interest payments of $70 and will mature in five years if the current market interest rates for all bonds of the same maturity and bond rating is %?
Quick Way: Find rCPN and compare to rd; rCPN = $70/$1,000 = %; rd = rCPN  VB = $1,000; The bond is selling at par.
Longer Way: P/Y=1, N=5, I/Y=7, PMT=70, FV=1000, CPT PV; PV = VB = $1,000
10. A $1000 face value bond with a maturity of 10 years and a % coupon rate paying quarterly
coupon payments is currently selling for $ (minus fees and transaction costs). What is the yield to maturity of this bond?
T=10, m=4; n = 40; PMT = $1,000(0.0536/4) = $13.4
P/Y=4, N=40, PV= , PMT=13.4, FV=1000; CPT, I/Y; YTM = %
13. The stock of Gigantic Jim’s Large & Tall Men’s Clothiers Inc. is currently selling for $50 per share. The firm pays quarterly dividends and plans to pay a dividend of $0.60 at the end of this quarter (i.e. at t=1). The firm's dividends are expected to grow at a rate of 18% per year for the next year (i.e. until t=4). After this time, the dividends are expected to grow at a constant rate of 8% per year for the foreseeable future. The stock's required rate of return is 12%. Is this stock undervalued or overvalued and by how much?
1) Find D2, D3 & D4: D1 = $0.60
D2 = $0.60(1+0.18/4) = $6270; D3 = $0.60(1+0.18/4)2 = $0.6552; D4 = $0.60(1+0.18/4)3 = $0.6847
2) Find PV at t=0 of D1, D2, D3 & D4 and sum them
Uneven Cash flow approach:
CF, 2nd CLR WORK
0, ENTER
↓, 0.60, ENTER
↓, ↓,0.627, ENTER
↓, ↓, , ENTER
↓, ↓, , ENTER
NPV, 3, ENTER (I/Y= rs/m = 12%/4 = 3%)
↓, CPT: NPV = $2.3815
3) Find Horizon Value: D4(1 + gN /m) / (rs/m – gN/m) = $0.6847( /4) / (0.12/4 – 0.08/4) = $
4) Find PV at t=0 of Horizon Value: P/Y=4, N=4, I/Y=12, FV= ; CPT,PV = $
5) P0 = $ $ = $64.43; $50 - $ = -$14.43; The stock is undervalued by $14.43
VB,0 1
VB,1
Beginning of the Year
End
of the Year 7
t = ? (infinity) 4 5 6 1 2 3
rs = 12.0% D2 D3 D4
Supernormal Growth
(gSN=18%, t=0 thru t=4) D5 D6
Dinfinity D7
Normal Growth (gN= 8%, t=4 & onward)
D1 = $0.60
Horizon Value (VH)

2. MGT 326 Spring 2015 Test 2 Problem Solutions
14. Reference the stock described in Problem 13 above; what is the expected value of this stock one year from now?
Three answers are acceptable:
c) VH from Prob. 13 = $69.84
d) P/Y=4, N=4, I/Y=18, PV=64.43, CPT FV, P4= $76.83
e) P/Y=4, N=4, I/Y=18, PV=50, CPT FV, P4= $59.63