Stock and Bond Valuations
• Problem 1 on page 251
Using the earnings model, what is the value of the stock?
Is the relationship linear?
Using the constant-growth dividend discount model, what is the value of the stock?
• Problem 1 on page 291(I did this spreadsheet incorrectly. Please, help me to correct it.)
As an investor, you are considering an investment in the bonds of the Front Range Electric Company. The bonds pay interest semiannually, will mature in eight years, and have a coupon rate of 4.5% on a face value of $1,000. Currently, the bonds are selling for $900.
If your required return is $5.75 for bonds in this risk class, what is the highest price you would be willing to pay?
What is the current yield of these bonds?
If you hold the bonds for one year, and interest rates do not change, what total rate of rate of return will you earn? Why is this different from the current yield and YTM?
If the bonds can be called in three years with a call premium of 4% of the face value, what is the yield to call on these bonds?
If market interest rates remain unchanged, do you think it is likely that the bond will be called in three years? Why or why not?
• Problem 1 on page 317
Based on the five-year track record, what is Dempere’s EPS growth rate? What will the dividend be in 2012?
If Dempere’s after-tax cost of debt is 6%, what is the WACC with retained earnings? With new common equity?
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