Bond and Stock Valuation Practice

Flashcards covering bond valuation inputs, stock valuation calculations with dividend growth, and buy/sell decision rules based on price versus value.

When using a $TI\text{-}84$ calculator to solve for bond value, how should the required return rate ($I$) be entered?

It must be entered as a whole number (for example, $8$ rather than $0.08$) because the financial calculator automatically interprets the input as a percentage.

What is the general decision rule when comparing an asset's market price to its calculated value?

If the market price is less than the calculated value, it is a good buy because the investor acquires the asset at a discount relative to their goals.

What is the formula to find the expected dividend for next year ($D_1$) using the current dividend paid today ($D_0$)?

$D_1 = D_0 \times (1 + g)$, where $g$ is the dividend growth rate.

In the stock example with a value of $42$ and an actual market price of $39$, should the investor buy the stock?

Yes, because the actual market price ($39$) is less than the assessed value ($42$).

If an investor values a bond at $1137$, should they buy it if the price is $1100$, and should they buy it if the price rises to $1200$?

They should buy at $1100$ because the price is below the calculated value of $1137$, but they should not buy at $1200$ because it exceeds their valuation.

What shortcut applies when a bond's required return (or yield to maturity) equals its coupon rate (for example, both are $7\%$)?

The present value ($PV$) will automatically equal the face or par value of $1000$, meaning the bond trades at par without needing full calculator computation.

In the negative dividend growth example, what were the values of $D_0$, the growth rate ($g$), and the resulting $D_1$?

$D_0$ was $4$, the growth rate $g$ was $-0.03$ (or $-3\%$), resulting in a $D_1$ of $3.88$.

Why is a stock with a declining dividend (from $4$ to $3.88$) still considered a good buy when its calculated value is $32.33$ and its market price is $30$?

It is still a good buy because the investor values the stock at $32.33$, which is greater than the market price of $30$, despite the falling dividend.

According to the lecture, what company conditions might lead to a cut in dividends?

Decreased sales, reduced cash flow, or broader company struggles, since dividends are paid out of cash flows and retained earnings.