CE Board Exam Randomizer

⬅ Back to Engineering Economy Topics

Stock and Bond Valuation

Stock and bond valuation separates present worth of periodic income from present worth of the future selling or face value.

$$P=P_1+P_2$$

Problem: CE Board May 2016

ABC stock sells for P50, pays P3 annual dividends, and is expected to increase 5% yearly for 5 years. Find the company cost of capital.

$$F=50(1.05)^5=63.81$$

Solving $50=3(P/A,i,5)+63.81(P/F,i,5)$ gives $i=10.49\%$.

Final answer: $10.49\%$.

Problem: CE Board May 2019

A bond sells for $930, face value $1000, matures in 10 years, pays $70 yearly interest, and broker fee is $15 per bond. Find cost of capital.

Net proceeds: $930-15=915$.

$$915=70(P/A,i,10)+1000(P/F,i,10)$$

Trial gives $i=8.29\%$.

Problem: Bond Price from Coupons

A P100,000 bond pays 6% annual coupons and matures in 5 years. If the investor requires 8%, find the bond price.

$$P=6000(P/A,8\%,5)+100000(P/F,8\%,5)$$
$$P=6000(3.9927)+100000(0.6806)=92016$$

Answer: The bond is worth about P92,016.

Problem: Preferred Stock Value

A preferred stock pays P12 per share annually. If the required return is 9%, estimate its value.

$$P=\frac{D}{i}=\frac{12}{0.09}=133.33$$

Answer: The value is about P133.33 per share.

Problem: Constant-Growth Stock

A stock just paid a P5 dividend. Dividends grow at 4% per year and the required return is 11%. Find the stock value.

$$P_0=\frac{D_1}{k-g}=\frac{5(1.04)}{0.11-0.04}=74.29$$

Answer: The stock value is about P74.29.

Scroll to zoom

Exam Generator Problems

Additional board-style practice items for this topic.

Question Bank: t1085

MSTE - Engineering Economy / Engineering Economy / Gemini mapped Chapter 7 to 10

A bond pays P50,000 per year and has a face value of P500,000 at the end of eight years, when it has to be redeemed. If its current discounted price is P390,000, what true interest could be earned on the bond?

  1. 12.2%
  2. 13.4%
  3. 15.8%
  4. 14.9%
Find $i$ such that the price equals the present worth of coupons plus redemption:
$$390{,}000 = 50{,}000\,(P/A,i,8) + 500{,}000\,(P/F,i,8)$$
By trial, at $i = 14.9\%$: $(P/F) = 1.149^{-8} = 0.3292$, $(P/A) = 4.502$.
$$P = 50{,}000(4.502) + 500{,}000(0.3292) \approx 390{,}000 \;\checkmark$$
$$\boxed{i \approx 14.9\%}$$