Citibank: basic of corporate finance
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4-14 VALUING FINANCIAL ASSETS
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VALUING FINANCIAL ASSETS 4-15
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4 PROGRESS CHECK 4
Directions: Answer each question by checking the correct answer(s) or by calculating
the answer and entering it on the blank line.
1. Match each term in Column A with its correct definition in Column B.
Column A
_____Coupon
_____Coupon rate
_____Face value
_____Maturity date
_____Zero-coupon
Column B
a) Issuer pays face value to investor
b) Investor receives return at maturity
c) Establishes amount issuer will pay
d) Period interest payment
e) Principal of loan agreement
2. Since the present value of a bond has an inverse relationship to market rates:
____ a) a bond with a coupon rate that is higher than the prevailing interest rate
sells at a discount to the par value.
____ b) a bond with a coupon rate that is lower than the prevailing interest rate
sells at a premium to the par value.
____ c) a bond with a coupon rate that is higher than the prevailing interest rate
sells at a premium to the par value.
____ d) a bond with a coupon rate that is the same as the market rate only can be
sold in the primary market.
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4-16 VALUING FINANCIAL ASSETS
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ANSWER KEY
1. Match each term in Column A with its correct definition in Column B.
Column A
d Coupon
c Coupon rate
e Face value
a Maturity date
b Zero-coupon
Column B
a) Issuer pays face value to investor
b) Investor receives return at maturity
c) Establishes amount issuer will pay
d) Period interest payment
e) Principal of loan agreement
2. Since the present value of a bond has an inverse relationship to market rates:
c) a bond with a coupon rate that is higher than the prevailing interest rate
sells at a premium to the par value.
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VALUING FINANCIAL ASSETS 4-17
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PROGRESS CHECK
(Continued)
3. A bond matures in one year and pays interest at maturity. If the face value of the bond
is $500,000, the coupon rate is 9%, and the required rate of return is 9%, what is the
present value ?
$_____________________
4. The XYZ Corporation has issued a 10-year bond with a face value of $1,000 and a
coupon rate of 12%. Interest is paid annually, and the discount rate is 11%. What is
the present value of the bond?
$_____________________
5. A $100 bond carries an 8% coupon rate, matures in 10 years with interest paid
annually, and is discounted at a rate of 7%. What is the bond's present value?
$_____________________
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4-18 VALUING FINANCIAL ASSETS
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ANSWER KEY
3. A bond matures in one year and pays interest at maturity. If the face value of the bond
is $500,000, the coupon rate is 9%, and the required rate of return is 9%, what is the
present value ?
$500,000.00
Using a financial calculator:
Number of payments = 1
Payment = $45,000
Discount rate = 9%
Face value = $500,000.
Press the present value key and you should get $500,000.
4. The XYZ Corporation has issued a 10-year bond with a face value of $1,000 and a
coupon rate of 12%. Interest is paid annually, and the discount rate is 11%. What is
the present value of the bond?
$1,058.89
Using a financial calculator:
Number of payments = 10
Payment = $120
Discount rate = 11%
Face value = $1,000
Press the present value key to get $1,058.89.
5. A $100 bond carries an 8% coupon rate, matures in 10 years with interest paid
annually, and is discounted at a rate of 7%. What is the bond's present value?
$107.02
Using a financial calculator:
Number of payments = 10
Payment = $8
Discount rate = 7%
Face value = $100
Press the present value key to get $107.02.
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VALUING FINANCIAL ASSETS 4-19
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PROGRESS CHECK
(Continued)
6. ABC Industries' bonds have a coupon rate of 11%, a maturity of 10 years, and a face
value of $1,000. If the coupons are semi-annual, and the investor's required return is
12%, what is the value of the bond?
$_____________________
7. A company has been paying an annual common stock dividend of $0.75 per share and
is not expecting any increase in the future. If the appropriate discount rate is 13%,
what is the present value of the common stock?
$_____________________
8. A company has been paying an annual common stock dividend of $12 per share and is
expecting to raise the dividend at a 5% annual rate. If the required rate of return is
11%, what would an investor expect the stock to sell for?
$_____________________
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4-20 VALUING FINANCIAL ASSETS
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ANSWER KEY
6. ABC Industries' bonds have a coupon rate of 11%, a maturity of 10 years, and a face
value of $1,000. If the coupons are semi-annual, and the investor's required return is
12%, what is the value of the bond?
$942.65
Since the bond pays interest semi-annually, we need to make a couple
of adjustments to arrive at the proper solution. With a 11% semi-annual
coupon, there are two $55 interest payments per year ($110 / 2 = $55).
There will be 20 payments over the life of the bond. The appropriate
discount rate is a semi-annual rate of 6% (12% / 2 = 6%).
Using a financial calculator:
Number of payments = 20
Payment = $55
Discount rate = 6%
Face value = $1,000
Press the present value key to get $942.65.
7. A company has been paying an annual common stock dividend of $0.75 per share and
is not expecting any increase in the future. If the appropriate discount rate is 13%,
what is the present value of the common stock?
$5.77
V = D / R
V = $0.75 / 0.13
V = $5.77
8. A company has been paying an annual common stock dividend of $12 per share and is
expecting to raise the dividend at a 5% annual rate. If the required rate of return is
11%, what would an investor expect the stock to sell for?
$210
V = D
o
[(1 + G) / (1 + R)]
V = $12[(1 + 0.05) / (0.11 - 0.05)]
V = $12[1.05 / 0.06]
V = $210
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VALUING FINANCIAL ASSETS 4-21
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PROGRESS CHECK
(Continued)
9. PPQ Company has paid a $3.60 dividend on each share of common stock for the past
three years and does not expect growth in the future. If the present value of the stock
is $40.00, what rate of return must investors be demanding?
$_____________________
10. A share of preferred stock pays an annual dividend of $10. Calculate its present value
to an investor whose required return is 12%.
$_____________________
11. A stock pays a 10% dividend on its $50 par value and the investor's required rate of
return is 8%. What is the present value of the preferred stock?
$_____________________
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4-22 VALUING FINANCIAL ASSETS
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ANSWER KEY
9. PPQ Company has paid a $3.60 dividend on each share of common stock for the past
three years and does not expect growth in the future. If the present value of the stock
is $40.00, what rate of return must investors be demanding?
9%
R = D / V
R = $3.60 / 40
R = 0.09 or 9%
10. A share of preferred stock pays an annual dividend of $10. Calculate its present value
to an investor whose required return is 12%.
$83.33
V = D / R
V = $10 / 0.12
V = $83.33
11. A stock pays a 10% dividend on its $50 par value and the investor's required rate of
return is 8%. What is the present value of the preferred stock?
$62.50
V = D / R
V = $5 / 0.08 The dividend is $5 (0.10 x $50 = $5)
V = $62.50
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Unit 5
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