Question

1. ABC Corp. has earnings of $15 million per year and 300,000 shares outstanding. If other, similar firms in the industry have price/earnings ratios of around 6, what is the estimated stock value of ABC Corp.?

2. Fill in the blank with the correct term below the definition:

1.) Type of bond which is selling at a price below its face value. _________________

2.) Type of bond which is selling at a price above its face value. _________________

3.) Type of bond which is selling at a price equal to its face value. ________________

3. What is the coupon payment on a bond with a $1,000 face value and a 6% coupon rate?

4. Following an announcement that the CFO of a large, publicly traded company has resigned, the price of the stock plummeted. What might explain this sudden drop, and why?

5. A bond has a face value of $1,000, current price of $960, a 6% coupon rate, has 3 years left until maturity and the discount rate is 4%.

a. What is its coupon payment?

b. What is its current yield?

c. What is its yield to maturity?

Answer 1

1. Total Earnings = $15 Million. No of Shares Outstanding = 300000;

EPS = Total Earnings/No of Shares = 15 Million/300000 = $50 pershare

Market Price Per share =   P/E Ratio * EPS = 6*50 = $300 per share

2. a. Discount Bond,

b. Premium Bond

c. Par Bond

A bonds which is selling at a price below its face value is called discount bond, whereas if the bond is selling at a price above its face value is called premium bond. But is it is selling at a price equal to its face value, it will be known as Par bond. The bond will be premium bond or discount bond or par bond depends upon the current interest rate prevailing in the market. There is an inverse relationship between prevailing interest rate and value of Bond.

3. Face Value = $1000 Coupon Rate = 6%

Coupon Payment = Face Value * Rate = 1000 * 6/100 = $ 60

4. Although resigning and joining of CFO in any company is a routine feature, but it may be a concern for shareholders of a small company or for a company that is already under-performing. Investors generally sees sudden exit of top management as an early sign of some weakness in the company say goverance issue or wrong acquistion or working crisis in the company. As a result the price of stock plummeted.