Question

1.We know that the price earnings(P/E) ratio is 10. We expect the EPS to be $1 this year and to grow at 4% next year. What is the market price of the stock?
2. a) There is a stock which pays a $!2 dividend annually but it does not alter. If the cost of equit is 10%, what are investors willing to pay for that stock.
b) If the aforementioned stock has a dividend which grows at a 2% rate, what will the market price be, if the coe is the same?

3. We buy a put option of Florenthal, Lesser and associates. Its premium is $4 and the strike price is $44. The current market price is $50. If the price drops to $35, shall we exercise the put option? If not, why not, and If yes, why yes? Compare the two cases of owning the stock versus not owning it in terms of rate of return the investor makes

4.We have a stock Bottine and Despotakis (A&D) which we buy for $10. We keep it for 6 years at which point we sell it for $25. During the six year period, it pays us $12 which we reinvest at 5% annual return. Calculate the rate of return we make per annum.

5. We know the following about Alloy and Brant (A&B). Total assets are $220m, D is $140m, E is $60m, preferred stock of $20m, cash is $100m and the # of shares is 1m. We estimate that the market value of equity is 2 times the book value of it. Finally, a fire sale of the firm would bring 30% of the value to the company. Compute the book value, liquidation value, replacement value and enterprise value    per share of A&B.   
6. We have the following information for Clough, Garcia and associates. The stock pays a $1          dividend and it will grow by 200% the first year 100% the second year and 2% forever   after that. The unlevered bheta is 1, D/E is 60/40 and the tax rate is .4. Additionally, we know the treasury bond rate is .03 and the ROR of the S&P has been 10%. Derive the stock price of (C&G).
7. We have the Hargrove par bond paying a coupon rate of 8% and having a maturity of 20 years. If the coupon rate were to alter to 4%, what would the new duration be? Under what circumstances would duration equal maturity?

8. We have the Fitzpatrick bond which has a convexity of 30, a duration of 4, a ytm of 12% and a maturity of 25 years. The central bank is injecting huge liquidity , and there is no fear of inflation. If the yields alter by 100 basis points, what would the price change be? If the yields were to alter by 200 basis points, what would be the new change?

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Answer 1:

Given that
PE ratio 10
EPS for this year $1
Growth rate 4%
Expected earnings = EPS for this year * (1 + growth rate)
Expected EPS is $1,04
Market price = EPS for next year * Forward PE ratio $10,40 ...

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