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FNCE+2P91-Corporate+Finance-Notes-Chapter+8-Stock+Valuation.docx

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Department
Finance
Course
FNCE 2P91
Professor
Clarke Melville
Semester
Winter

Description
FNCE 2P91 - Section 05 Winter 2011 - Duration 03 15.02.11 FNCE 2P91: Corporate Finance-Notes-Chapter 8: Stock Valuation Notes Saturday, February 19  Quiz Two  Bonds and Stocks  Chapters 7 and 8  Lab 5  Stocks Chapter 8 Midterm  March 5  Saturday  Up to and including today’s class Next Week  Reading Week st March 1  Two weeks from today  Chapter 9  not on the midterm  Review BOOSTER JUICE EXAMPLE Instead of spending $7.29 per week on Booster Juice, an aspiring 2P91 student invests that money at an EAR of 8% every week for 4 years from age 18 to 22. Then he/she lets the savings compound until retirement at age 65. How much does the student have at age 65? EAR 6% EWR ? Step One: How much have they saved at age 22? $7.29 annuity [ ] Step Two: Let the FV22grow at the EAR of 6% for 43 years FNCE 2P91 - Section 05 Winter 2011 - Duration 03 REVIEW QUESTION Find the N value of an annuity formula You owe $5000 and have agreed to make $150 payments per month to lender. If the APR you are being charged is 6%, how many payments will you have to make? PV $5000 Payment $150 r N ? [ ] REVIEW QUESTIONS FROM TEXT FOR MIDTERM Chapter 7 Chapter 8 Chapter 6  7-3  8-9  6-11  7-4  8-10  6-13  7-14  8-11  6-14  7-16  8-13  6-29  7-24  8-19  6-33  7-26  8-20  6-39  7-30  6-59  6-69 BOND REVIEW  Price of any Bond is going to be equal to the Present Value of Cash Flows For Example: We had a bond with 12% coupon rate and 30 years to maturity with a YTM of 12%. The face value is $1000. What is the price of the bond going to be? [ ] If YTM increases to 15% [ ] Interest Rate Risk  Longer bonds will have more price movement that shorter bonds for same YTM impact FNCE 2P91 - Section 05 Winter 2011 - Duration 03 Example Two Compare above 30 year bond to 2 year bond Coupon Rate 12% Maturity 2 years YTM 12% Face Value $1000 Price = $1000 Part Two: Question: If YTM increase to 15% Answer: HOLDING PERIOD YIELD  Try question 7-30 in the textbook Question: You just bought a 20 year bond with a 6% coupon rate for $894.06. Face value is $1000. What is the YTM? Answer: Option One: YTM will be less than 6%. Therefore bond is selling at discount. [ ] Solve for YTM Option Two: Estimate YTM [ ] ̂ [ ] ̂ Check: At 7% YTM [ ] Therefore, YTM is 7% FNCE 2P91 - Section 05 Winter 2011 - Duration 03 Part Two: Question: Inflation has been creeping up over 5 years so that in 5 years the bonds YTM is now 9%. What is the price now? Answer: [ ] Part Three: Question: Boss tells you we need the money, sell it! What is the Holding Period Yield? Answer: [ ] Solve for HPY  Trial and Error Try 5% So 5% is too high Try at 3.90% So HPY is 3.90%  Try question 7-30 for Holding Period Yield  If you have the 6 edition it is 7-27 CHAPTER 8: STOCK VALUATION Formula: How do investors get paid? Bonds  Coupons  Face Value/Principle Repaid o Cash Flows are KNOWN o Length in years of terms Stocks  Dividends  Perpetual Cash Flow
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