# Common stock valuation | Business & Finance homework help

1.  (Floating-rate loans). The Bensington Glass Company entered into a loan agreement with the firm’s bank to finance the firm’s working capital. The loan called for a floating rate that was 27 basic points (0.27 percent) over an index based on LIBOR. In addition, the loan adjusted weekly based on the closing value of the index for the previous week and had a maximum annual rate of 2.24 percent and a minimum of 1.72 percent. Calculate the rate of interest for week 2 through 10.

 Date LIBOR Week 1 1.94% Week 2 1.59% Week 3 1.55% Week 4 1.32% Week 5 1.59% Week 6 1.66% Week 7 1.69% Week 8 1.94% Week 9 1.88%

The rate of interest for week 2 is ………%

1.  (Bond valuation) Calculate the value of a bond that matures in 17 years and has a \$1,000 par value. The annual coupon interest rate is 15% and the market’s required yield to maturity on a comparable risk bond is 14 %.

The value of the bond is ……..

2.  (Common stock valuation). Header Motor, Inc.., paid a \$4.43 dividend last year. At a constant growth rate of 5 percent, what is the value of the common stock if the investors requested a 10 percent rate of return?

The value of the common stock is \$……

3. (Common stock valuation) The common stock of NCP paid \$1.41 in dividends last year. Dividends are expected to grow at an annual rate 6.60 percent for an indefinite number of years.

1. If your required rate of return is 8.70 percent, what is the value of the stock for you?

2. Should you make the investment?

1. If your required rate of return is 8.70 percent, the value of the stock for you is \$…..

1. (Related to Checkpoint 10.1)  Relative valuation of common stock). Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions.

1. The investor’s required rate of return is 13 13%

2. The expected level of earnings at the end of this year ( E1) is \$7,

3. The firm follows a policy of retaining 60 % of its earnings,

4. The return on equity (ROE) is 13%, and

5. Similar share of stock sell at multiples of 7.693 times earnings per share,

Now show that you get the same answer using the discovered dividend model.

1. The stock price using the P/E ratio valuation method is \$…..

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