A bond pays an annual coupon rate of 10%.  If investor's required rate
of return is now 8% on these bonds, they will priced at:
a)par value
b)a premium to par value
c)a discount to par value
d)cannot be determined from information given


A preferred stock pays $5.00 in annual dividends.  If your required
rate of return is 13%, how much will you be willing to pay for one
share?
a)$38.46
b)26.26
c)65.46
d)46.38


A common stock is currently selling at $24.00 per share.  It recently
paid dividends of $1.92 per share and projects growth at a rate of 4%.
 At this rate, what is the stock's expected rate of return?
a)4.08%
b)8.00%
c)12.00%
d)8.80%

A common stock recently paid dividends of $1.96 per share.  If the
company is growing at a rate of 2% per year, and your required rate of
return is 8%, what is the stock worth to you?
a)$100.00
b)33.32
c)32.67
d)20.00

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Request for Question Clarification by nauster-ga on 11 Feb 2003 16:01 PST

I can provide you with enough information and explanation that you
will be able to answer these questions on your own. Do you consider
that to be a satisfactory form of answer?

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Clarification of Question by k9queen-ga on 11 Feb 2003 16:14 PST

No

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Request for Question Clarification by livioflores-ga on 12 Feb 2003 08:06 PST

Hi k9queen !!!

Do you consider the comment below as the answer?
If you need the formulas or more detailed calculations and some more
sources or explanations, i.e. you consider the comment as an
incomplete answer, please let me know and I will answer the question
for you.

Thank you.
livioflores-ga

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Clarification of Question by k9queen-ga on 12 Feb 2003 08:34 PST

It works for me!

the bond would be trading at a premium to par. because the question is
unclear as to whether the 8% is a current yield or a yield to maturity
you cannot determine a trading price but in either case, cy or ytm,
the price will be in excess of par.

in a poorly worded question, the answer sought is 38.46. the question
should be what is the maximum you would be willing to pay. if at 38.46
you can achieve your target return of 13%, it would stand to reason
that you would jump at the chance to make the same investment at 26.26
and increase your return to 19%. in the real world, there are times
when a minimum return is required to make the investment viable. i can
think of no instance where you would reject returns in excess of your
target minimum. so again, the most the stock would be worth to me is
38.46 but i wouldn't insist on paying that if i could get it at 26.26.

the projected total rate of return as cited in the question is 12%. 8%
cash and 4% projected growth.

this question suffers in form in a manner similar to the question
about the preferred price. the answer sought is 32.67. at that price
the cash return is 6%. the total return is the 6% cash plus the 2%
projected growth and indicates an 8% total return. but as before, if i
would commit funds at 32.67 for 8% then the 11.6% an investor gets by
paying 20.00 seems like and even better deal. as i said before, in the
real world, no one rejects or gives back returns in excess of minimums
so the construct of the question is weak.

Good Enough! Thanks!