# BUSINESS

**Financial Tools problesm set**

Complete the following problems from Chapters 6 and 7 in *Principles of Managerial Finance*:

- Bond Valuation: P6-13; P6-17; P6-18; P6-19; P6-22
- Stock Valuation: P7-6; P7-8; P7-9; P7-14; P7-15; P7-16

Use the Chapters 6-7 Excel resource (if needed) to complete the problem-set assignment in this topic.

Please show all work for each problem.

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**P6-13 **Valuation of assets Using the information provided in the following table, find the value of each asset.

Asset

Cash flow

Appropriate required return

End of year

Amount

A

1

$ 5,000

18%

2

5,000

3

5,000

B

1 through oc

$ 300

15%

C

1

$ 0

16%

2

0

3

0

4

0

5

35,000

D

1 through 5

$ 1,500

12%

6

8,500

F

1

$ 2,000

14%

2

3,000

3

5,000

4

7,000

4,000

1,000

**P6-17 Bond value and changing required returns **Midland Utilities has outstanding a bond issue that will mature to its $1,000 par value in 12 years. The bond has a coupon

interest rate of 11% and pays interest *annually.*

a. Find the value of the bond if the required return is (1) 11%, (2) 15%, and

(3) 8%.

b. Plot your findings in part **a **on a set of “required return *(x *axis)—market value of bond (y axis)” axes.

c. Use your findings in parts **a **and **b **to discuss the relationship between the coupon interest rate on a bond and the required return and the market value of the bond relative to its par value.

d. What *two *possible

**P6-18 Bond value and time: Constant required returns **Pecos Manufacturing has just issued a 15-year, 12% coupon interest rate, $1,000-par bond that pays interest *annually.*

The required return is currently 14%, and the company is certain it will remain at 14% until the bond matures in 15 years.

a. Assuming that the required return does remain at 14% until maturity, find the value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, and (6) 1 year to maturity.

b. Plot your findings on a set of “time to maturity *(x *axis)—market value of bond (y axis)” axes constructed similarly to Figure 6.5 on page 252.

c. All else remaining the same, when the required return differs from the coupon interest rate and is assumed to be constant to maturity, what happens to the bond value as time moves toward maturity? Explain in light of the graph in part **b.**

**P6-19 Bond value and time: Changing required returns **Lynn Parsons is considering investing

in either of two outstanding bonds. The bonds both have $1,000 par values and 11% coupon interest rates and pay *annual *interest. Bond A has exactly 5 years to maturity, and bond B has 15 years to maturity.

a. Calculate the value of bond A if the required return is (1) 8%, (2) 11%, and (3) 14%.

b. Calculate the value of bond B if the required return is (1) 8%, (2) 11%, and (3) 14%.

c. From your findings in parts **a **and **b, **complete the following table, and discuss the relationship between time to maturity and changing required returns.

Required return \ 1).,11(-1 1.)( d I.