Solved by verified expert :Rest attched in the file total 34 question1 Problem 10-2 Bond value [LO3]

Applied Software has $1,000 par

value bonds outstanding at 20 percent interest. The bonds will mature in 15

years. UseAppendix

BandAppendix

D.

Compute the current price of the

bonds if the present yield to maturity is(Round “PV Factor” to 3 decimal places, intermediate and

final answers to2

decimal places. Omit the “$” sign in your response):

Price

of the

bond

(a) 10 percent

$

(b) 15 percent

$

(c) 12 percent

$

2.

value:

1.00

points

Problem 10-4 Bond value [LO3]

Barry’s Steroids Company has

$1,000 par value bonds outstanding at 14 percent interest. The bonds will

mature in 40 years.

If the percent yield to maturity

is 11 percent, what percent of the total bond value does the repayment of

principal represent? UseAppendix

BandAppendix

D.(Round intermediate calculations to 2 decimal

places, “PV Factor” and final answer to 3 decimal places. Omit the

“%” sign in your response.)

Principal repayment

%

3.

value:

1.00

points

Problem 10-5 Bond value [LO3]

Essex Biochemical Co. has a $1,000

par value bond outstanding that pays 19 percent annual interest. The current

yield to maturity on such bonds in the market is 11 percent. UseAppendix

BandAppendix

D.

Compute the price of the bonds for

these maturity dates(Round “PV

Factor” to 3 decimal places, intermediate and final answers to 2 decimal

places. Omit the “$” sign in your response):

Price

of the

bond

(a) 25 years

$

(b) 15 years

$

(c) 4 years

$

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5.

value:

1.00

points

Problem 10-11 Effect of maturity on bond price [LO3]

Refer toTable

10-2

(a)

Assume the interest rate in the

market (yield to maturity) goes down to 8 percent for the 10 percent bonds.

Using column 2, indicate what the bond price will be with a 10-year, a

20-year, and a 30-year time period.(Round

“PV Factor” to 3 decimal places, intermediate calculations and

final answers to 2 decimal places. Omit the “$” sign in your

response.)

Maturity

Bond

price

10 Years

$

20 years

30 years

(b)

Assume the interest rate in the

market (yield to maturity) goes up to 12 percent for the 10 percent

bonds. Using column 3, indicate what the bond price will be with a 10-year, a

20-year, and a 30-year period.(Round

“PV Factor” to 3 decimal places, intermediate calculations and

final answers to 2 decimal places. Omit the “$” sign in your

response.)

Maturity

Bond

price

10 Years

$

20 years

30 years

(c)

Assume the interest rate in the

market (yield to maturity) goes down to 8 percent for the 10 percent bonds.

If interest rates in the market are going down, which bond would you choose

to own?

Longest-term bond

Shortest-term bond

(d)

Assume the interest rate in the

market (yield to maturity) goes up to 12 percent for the 10 percent bonds. If

interest rates in the market are going up, which bond would you choose to

own?

Longest-term bond

Shortest-term bond

6.

value:

1.00

points

Problem 10-13 Effect of yield to maturity on bond price [LO3]

Tom Cruise Lines, Inc., issued

bonds five years ago at $1,000 per bond. These bonds had a 20-year life when

issued and the annual interest payment was then 14 percent. This return was

in line with the required returns by bondholders at that point as described

below:

Real rate of return

4

%

Inflation premium

5

Risk premium

5

Total

return

14

%

Assume that five years later the

inflation premium is only 2 percent and is appropriately reflected in the

required return (or yield to maturity) of the bonds. The bonds have 15 years

remaining until maturity.

Compute the new price of the bond.

UseAppendix

BandAppendix

D.(Round

“PV Factor” to 3 decimal places, intermediate and final answer

to 2 decimal places. Omit the “$” sign in your response.)

New price

$

rev: 07-13-2011

7.

value:

2.00

points

Problem 10-14 Analyzing bond price changes [LO3]

(a)

Find the present value of 3

percent × $1,000 (or $30) for 15 years at 11 percent. The $30 is assumed to

be an annual payment. UseAppendix

D. (Round “PV Factor” to

3 decimal places, intermediate and final answerto 2 decimal places. Omit the “$” sign

in your response.)

Present value

$

(b)

Add the answer obtained in partato 1,000.(Round “PV Factor” to 3 decimal

places, intermediate and final answerto 2 decimal places. Omit the “$” sign in your

response.)

Present value

$

8.

value:

2.00

points

Problem 10-17 Deep discount bonds [LO3]

Lance Whittingham IV specializes

in buying deep discount bonds. These represent bonds that are trading at well

below par value. He has his eye on a bond issued by the Leisure Time

Corporation. The $1,000 par value bond pays 8 percent annual interest and has

17 years remaining to maturity. The current yield to maturity on similar

bonds is 10 percent.

(a)

What is the current price of the

bonds? UseAppendix

BandAppendix

D. (Round “PV Factor” to

3 decimal places, intermediate and final answers to 2 decimal places. Omit

the “$” sign in your response.)

Current price

$

(b)

By what percent will the price of

the bonds increase between now and maturity?(Round

“PV Factor” to 3 decimal places, intermediate and final answers to

2 decimal places. Omit the “%” sign in your response.)

Price increases by

%

rev: 07-13-2011

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9.

value:

1.00

points

Problem 10-19 Approximate yield to maturity [LO3]

Bonds issued by the Tyler Food

Corporation have a par value of $1,000, are selling for $1,410, and have 20

years remaining to maturity. The annual interest payment is 20.5 percent ($205).

Compute the approximate yield to

maturity.(Do not round intermediate calculations. Round

your answer to 2 decimal places. Omit the “%” sign in your

response.)

Approximate yield to

maturity

10.

value:

2.00

points

Problem 10-22 Bond value-semiannual analysis [LO3]

You are called in as a financial

analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par

value bonds have a quoted annual interest rate of 11 percent, which is paid

semiannually. The yield to maturity on the bonds is 14 percent annual

interest. There are 20 years to maturity. UseAppendix

BandAppendix

D.

(a)

Compute the price of the bonds

based on semiannual interest payments.(Round

“PV Factor” to 3 decimal places, intermediate and final answer to 2

decimal places. Omit the “$” sign in your response.)

Price of the bonds

$

(b)

With 15 years to maturity, if

yield to maturity goes down substantially to 8 percent, what will be the new

price of the bonds?(Round “PV Factor” to 3 decimal

places, intermediate and final answer to 2 decimal places. Omit the

“$” sign in your response.)

New price

$

11.

value:

1.00

points

Problem 10-24 Preferred stock value [LO4]

Bedford Mattress Company issued

preferred stock many years ago. It carries a fixed dividend of $11 per share.

With the passage of time, yields have gone down from the original 10 percent

to 9 percent (yield is the same as required rate of return).

(a)

What was the original issue price?(Round your answer to 2 decimal places.Omit the “$” sign in your response.)

Original price

$

(b)

What is the current value of this

preferred stock?(Round your answer to 2 decimal

places.Omit the “$”

sign in your response.)

Current value

$

12.

value:

1.00

points

Problem 10-26 Preferred stock rate of return [LO4]

Grant Hillside Homes, Inc., has

preferred stock outstanding that pays an annual dividend of $10.30. Its price

is $167.

What is the required rate of

return (yield) on the preferred stock?(Round

your answer to 2 decimal places. Omit the “%” sign in your

response.)

Rate of return

%

13.

value:

1.00

points

Problem 10-28 Common stock value [LO5]

Laser Optics will pay a common

stock dividend of $3.20 at the end of the year (D1). The required

rate of return on common stock (Ke) is 20 percent. The firm has a

constant growth rate (g) of 10 percent.

Compute the current price of the

stock (P0).(Round

your answer to 2 decimal places.Omit the “$” sign in your response.)

Current price

$

14.

value:

2.00

points

Problem 10-29 Common stock value under different market

conditions [LO5]

Ecology Labs, Inc., will pay a

dividend of $6.80 per share in the next 12 months (D1). The

required rate of return (Ke) is 15 percent and the constant growth

rate is 5 percent.(Each question is independent of the others.)

(a)

Compute the price of Ecology Labs’

common stock.(Round your intermediate and final answer to 2

decimal places. Omit the “$” sign in your response.)

Price

$

(b)

Assume Ke, the required

rate of return, goes up to 20 percent; what will be the new price?(Round your intermediate and final answer to 2

decimal places. Omit the “$” sign in your response.)

New price

$

(c)

Assume the growth rate (g) goes up

to 7 percent; what will be the new price? Kegoes back to its

original value of 15 percent.(Round your intermediate and final answer to 2

decimal places. Omit the “$” sign in your response.)

New price

$

(d)

Assume D1is $7.50; what will be the new price? Assume Keis

at its original value of 15 percent and g goes back to its original value of

5 percent.(Round your intermediate and final answer to 2

decimal places. Omit the “$” sign in your response.)

New price

$

15.

value:

2.00

points

Problem 10-31 Common stock value based on determining growth

rate [LO5]

Justin Cement Company had the

following pattern of earnings per share over the last five years:

Year

Earnings

per share

2006

$

10.00

2007

10.50

2008

11.03

2009

11.58

2010

12.16

The earnings per share have grown

at a constant rate (on a rounded basis) and is expected to do so in the

future. Dividends represent 40 percent of earnings.

(a)

Project earnings and dividends for

the next year (2011).(Round yourintermediate and final answers to 2 decimal places. Omit the

“$” sign in your response.)

2011

Earnings

$

Dividend

$

(b)

If the required rate of return (Ke)

is 13 percent, what is the anticipated stock price (P0) at the

beginning of 2011?(Round yourintermediate and final answers to 2 decimal places. Omit the

“$” sign in your response.)

Anticipated stock

price

$

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16.

value:

1.00

points

Problem 10-32 Common stock required rate of return [LO5]

A firm pays a $9.80 dividend at

the end of year one (D1), has a stock price of $137, and a

constant growth rate (g) of 5 percent.

Compute the required rate of

return (Ke).(Round yourintermediateand final answerto 2 decimal places. Omit the “%” sign in your

response.)

Rate of return

%

17.

value:

4.00

points

Problem 10-35 Common stock value based on PV calculations [LO5]

Beasley Ball Bearings paid a $4

dividend last year. The dividend is expected to grow at a constant rate of 4

percent over the next four years. The required rate of return is 16 percent

(this will also serve as the discount rate in this problem). UseAppendix

B.

(a)

Compute the anticipated value of

the dividends for the next four years.(Round your intermediate calculations and final answers to 3

decimal places. Omit the “$” sign in your response.)

Anticipated

value

D1

$

D2

$

D3

$

D4

$

(b)

Calculate the present value of

each of the anticipated dividends at a discount rate of 16 percent.(Round “PV Factor”, intermediate calculations and

final answers to 3 decimal places. Omit the “$” sign in your

response.)

PV

of

dividends

D1

$

D2

D3

D4

Total

$

(c)

Compute the price of the stock at

the end of the fourth year (P4).(Round “PV Factor”, intermediate calculations and final

answer to 3 decimal places. Omit the “$” sign in your response.)

Price of the stock

$

(d)

Calculate the present value of the

year 4 stock price at a discount rate of 16 percent.(Round “PV Factor”, intermediate

calculations and final answer to 3 decimal places. Omit the “$”

sign in your response.)

Price of the stock

(discounted)

$

(e)

Compute the current value of the

stock.(Round

“PV Factor”, intermediate calculations and final answer to 3

decimal places. Omit the “$” sign in your response.)

Current value

$

(f)

Use formula given below to show

that it will provide approximately the same answer as parte.(Omit the “$” sign in your response.)

P0

=

D1

Ke? g

Current value

$

(g)

If current EPS is equal to $5.329

and the P/E ratio is 1.2 times higher than the industry average of 6, what

would the stock price be?(Round your intermediate calculations and final

answers to 2 decimal places. Omit the “$” sign in your response.)

Stock price

$

(h)

By what dollar amount is the stock

price in partgdifferent from the stock price in partf?(Input the amount as a positive value. Round

intermediate calculations and final answer to 2 decimal places. Omit the

“$” sign in your response.)

Amount

$

(i)

In regard to the stock price in

partf, indicate

which direction it would move if

(1)

D1increases

(Click to select)

Stock price decreases

Stock price increases

(2)

Keincreases

(Click to select)

Stock price increases

Stock price decreases

(3)

g increases

(Click to select)

Stock price decreases

Stock price increases

18.

value:

1.00

points

Problem 11-2 Cost of capital [LO2]

Speedy Delivery Systems can buy a

piece of equipment that should provide an 6 percent return and can be

financed at 3 percent with debt. The CEO likes earning more than the cost of

debt, and he thinks this would be a good deal. The firm can also buy a

machine that would yield a 13 percent return but would cost 15 percent to

finance through common equity. Earning less than the cost of equity sounds

bad to the CEO. Assume debt and common equity each represent 50 percent of

the firm’s capital structure.

(a)

Compute the weighted average cost

of capital.(Round your intermediate and final answers to 1

decimal place. Omit the “%” sign in your response.)

Weighted average cost

of capital

%

(b)

Which project(s) should be

accepted?

Piece of equipment should be

financed.

New machine should be financed.

19.

value:

1.00

points

Problem 11-3 Effect of discount rate [LO2]

A brilliant young scientist is

killed in a plane crash. It was anticipated that he could have earned

$260,000 a year for the next 25 years. The attorney for the plaintiff’s

estate argues that the lost income should be discounted back to the present

at 5 percent. The lawyer for the defendant’s insurance company argues for a

discount rate of 10 percent.

What is the difference between the

present value of the settlement at 5 percent and 10 percent? Compute each one

separately.UseAppendix

D.(Round “PV Factor” to 3 decimal

places. Round your answers to the nearest dollar amount. Omit the

“$” sign in your response)

Present

value

PV at 5% rate

$

PV at 10% rate

Difference

$

20.

value:

1.00

points

Problem 11-5 Aftertax cost of debt [LO3]

Calculate the aftertax cost of

debt under each of the following conditions.(Round

your answers to 2 decimal places. Omit the “%” sign in your

response.)

Yield

Corporate

tax rate

Cost

of debt

a.

4.0

%

10

%

%

b.

6.6

20

c.

6.0

20