Based on the EFN Model Jotar Inc of Mesa Arizona has determined_Answer

Based on the EFN Model, Jotar Inc., of Mesa, Arizona has determined its funding needs to be $200 million for the ensuing fiscal year. They have decided to raise the funds by floating bonds. Each bond will have a Par Value of $1000, pay of coupon of 7 percent and mature in 4 years.

Required: Given the above information,

a. Determine the current market value (intrinsic) if your required rate of return is 14 percent. Assume annual compounding.

b. Holding everything constant and assuming that the coupon is paid on a semi-annual basis, what is the intrinsic value? Discuss your answer.

c. Now assume annual coupon payments but 20 years to maturity, what is the value of bond to you if your required rate of return is still 14 percent? Discuss your results.

d. What is the bond’s current yield? How does it compare with your required rate of return? Discuss your answer.

Problem 2.

Zota Inc., of Chandler, Arizona has a bond issue outstanding with 8 years remaining to maturity, with a coupon rate of 10 percent paid annually, and a Par Value of $1000.

Required:

If the current market value or price of the bond is $814.45, what is the bond’s yield to maturity (YTM)?

Problem 3.

Bilo Inc., of Gilbert, Arizona has floated some zero coupon bonds to finance its capital expenditures. The Par Value of each bond is $1000.

Required:

a. Assuming a market price of $300 with a maturity of 30 years, determine and discuss the bond’s yield-to-maturity.

b. Assuming a market price of $300 and a yield-to-maturity of 8 percent, determine and discuss the holding period.

c. Assuming a holding period of 10 years and a yield-to-maturity of 10 percent, determine and discuss the bond’s current market price.

Common Stock Valuation

Problem 1.

Fabo, Inc., of Tempe, Arizona has maintained a dividend payment of $4 per share for many years. This trend will continue in the foreseeable future. If investors require a 12 percent rate of return on this stock, what is the maximum price that they should pay? Why?

Problem 2.

Senor Duarte Antonio de la Garza, a UOP graduate with Invest Inc., of Phoenix, Arizona is trying to sell you a stock with a current market price of $25.00. The stock’s last dividend (Do) was $2.00, and earnings are dividends are expected to grow at a constant rate of 10 percent. If your required rate of return is 20 percent, should you buy or not buy this stock? Why?

Problem 3.

Corta Inc., of Glendale, Arizona last dividend payment was $1.50. It’s current equilibrium price is $15.75, and its expected growth rate is a constant 5 percent. If your required rate of return is 15 percent, what is your expected dividend yield and expected capital gains yield for the ensuing year if you bought the stock? Discuss your results.

Problem 4.

The Eddo company of Tucson, Arizona has been hard hit by increased competition. Analysts predict that earnings and dividends will decline at a rate 5 percent annually into the foreseeable future. If Eddo’s last dividend (Do) was $2.00, and investors required a rate of return is 15 percent, what will the stock price be in 3 years? Why?

Problem 5

Isakata Inc., of Peoria, Arizona currently pays a dividend of $2.00 per share. Dividends are expected to grow at a rate of 12 percent per year for the next five years and then continue growing thereafter (indefinitely) at a rate of 6 percent per year.

Required:

If your required rate of investment is 15 percent, what is the maximum price that you should pay for each share of Isakata is publicly traded? Why?