Question

Answer the following questions. Table 6-4 or Table 6-5. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.)

Required: Spencer Co.'s common stock is expected to have a dividend of $6 per share for each of the next 10 years, and it is estimated that the market value per share will be $107 at the end of 10 years. If an investor requires a return on investment of 6%, what is the maximum price the investor would be willing to pay for a share of Spencer Co. common stock today?

Mario bought a bond with a face amount of $1,000, a stated interest rate of 12%, and a maturity date 13 years in the future for $984. The bond pays interest on an annual basis. Three years have gone by and the market interest rate is now 14%. What is the market value of the bond today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Part 1

Year	PV factor @ 6%	Remarks
1	0.9434	= 1 / 1.06
2	0.8900	= 0.9434 / 1.06
3	0.8396	= 0.89 / 1.06
4	0.7921	= 0.8396 / 1.06
5	0.7473	= 0.7921 / 1.06
6	0.7050	= 0.7473 / 1.06
7	0.6651	= 0.705 / 1.06
8	0.6274	= 0.6651 / 1.06
9	0.5919	= 0.6274 / 1.06
10	0.5584	= 0.5919 / 1.06
Total	7.3601

	Amount	Multiply: PV factor @6%	Present value
Future value of share	$        107	0.5584	$    59.749
Dividend	$             6	7.3601	$    44.161
Maximum price investor willing to pay			$ 103.909
Maximum price investor willing to pay (Rounded)			$    103.91

Part 2

Year	PV factor @ 14%	Remarks
1	0.8772	= 1 / 1.14
2	0.7695	= 0.8772 / 1.14
3	0.6750	= 0.7695 / 1.14
4	0.5921	= 0.675 / 1.14
5	0.5194	= 0.5921 / 1.14
6	0.4556	= 0.5194 / 1.14
7	0.3996	= 0.4556 / 1.14
8	0.3506	= 0.3996 / 1.14
9	0.3075	= 0.3506 / 1.14
10	0.2697	= 0.3075 / 1.14
Total	5.2161

	Amount	Multiply: PV factor @14%	Present value
Face value	$            1,000	0.2697	$          269.70
Interest paid	$                120	5.2161	$          625.93
Market value of the bond today			$          895.63