1. MGT 326 Fall 2017 Test 2 Problem Solutions
4. A $1,000 face value Diamond Jim’s Corporation bond matures 1 Sept It has a % coupon rate and pays coupons semiannually. Its YTM as of 15 Nov 2017 was %. What is this bond’s retail price as of 15 Nov 2017? (There are 76 days between 1 Sep 2017 and 15 Nov There are 105 days between 15 Nov 2017 and 1 Mar 2018) (Use the Bond Worksheet, if you have one. Show all calculator inputs. Work in at least 4 decimal places)
SDT =
CPN = 6.15
RDT =
YLD = 5.02
PRI = %; VB = % x 10/% = $1,038.50
6. At the beginning of the year a $1,000 face value bond paying a coupon rate of % APR with semiannual payments and 15.5 years maturity was selling at par (excluding fees and transaction costs). At the end of the year the bond's YTM was %. What is this bond’s holding period return for the year?
Holding Period Return = EAR rcpn + Capital Gains Yield
EARCPN = NOM=8.72, C/Y=2; EFF = %
VB,0 = $1,000
VB,1: T=14.5, m=2; n = 29; PMT = $1,000(0.0872/2) = $43.60
P/Y=2, N=29, I/Y=7.96, PMT=43.6, FV=1000; CPT, PV: VB,1 = $1,064.69
Cap Gain Yield = ($1, $1,000)/$1,000 = %
Total Yield = % % = %
8. 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
9. A $1000 face value bond with a maturity of 8 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=8, m=4; n = 32; PMT = $1,000(0.0636/4) = $15.9
P/Y=4, N=32, PV= , PMT=15.9, FV=1000; CPT, I/Y; YTM = %
14. The stock of Jumpin’ Jim’s Parachuting and Ski Jumping Supplies Inc. is currently selling for $50 per share. The firm pays quarterly dividends and plans to pay a dividend of $0.65 at the end of this quarter (i.e. at t=1). The firm's dividends are expected to grow at a rate of 16% 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 6% 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 = $0.65
D2 = $0.65(1+0.16/4) = $0.6760; D3 = $0.65(1+0.16/4)2 = $0.7030; D4 = $0.65(1+0.16/4)3 = $0.7312
2) Find PV at t=0 of D1, D2, D3 & D4 and sum them
Uneven Cash flow approach:
CF, 2nd CLR WORK (Clear cash flow worksheet)
0, ENTER
↓, 0.65, ENTER
↓, ↓,$0.6760, ENTER
↓, ↓, $0.7030, ENTER
↓, ↓, $0.7312, ENTER
NPV, 3, ENTER (I/Y= rs/m = 12%/4 = 3%)
↓, CPT: NPV = $2.5613
3) Find Horizon Value: D4(1 + gN /m) / (rs/m – gN/m) = $ ( /4) / (0.12/4 – 0.06/4) = $
4) Find PV at t=0 of Horizon Value: P/Y=4, N=4, I/Y=12, FV= ; CPT,PV = $
5) P0 = $ $ = $46.52; $50 - $ = $3.47; The stock is undervalued by $3.47
VB,-1 -1
VB,0
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=16%, t=0 thru t=4) D5 D6
Dinfinity D7
Normal Growth (gN= 6%, t=4 & onward)
D1 = $0.65
Horizon Value (VH)