SOLUTION TO PRACTICE PROBLEMS (VALUATION) 1. Refer to the DCF model we have discussed in the class regarding evaluations of financial assets. Which of the following statements is most correct? a) The n in the model refers to how long you hold an asset (i.e. the holding period). b) The "n" in the model refers to the life of the asset being evaluated. c) The "n" in the model refers to the life of the investor who invests in the asset. d) The "n" in the model refers to the same life (usually 10 years) for all assets. 2. Refer to the DCF model discussed in the class for evaluating an asset. Which of the following statements is most correct? a) The RRR used in this model is a function of the risk of the investor (who is evaluating the asset); b) The RRR used in this model is a function of the overall risk of the firm that issues this asset; c) The RRR used in this model is a function of the risk of the seller of this asset. d) The RRR used in this model is a function of the risk inherent in the asset itself. 3. Suppose you calculate a stock's intrinsic value is $22.00. The stock is currently selling in the market for $24. The stock to you is a) Undervalued b) Overvalued c) Correctly valued d) It can be either under- or overvalued. 4. The following three securities have the same valuation model. a) Preferred stock, constant-growth common stocks, finite-life bonds b) Preferred stocks, zero-growth common stocks, finite-life bonds c) Preferred stocks, constant-growth common stocks, infinite-life bonds d) Preferred stocks, zero-growth common stocks, infinite-life bonds 5. HCSH has the following bond outstanding: coupon rate = 5%, years to maturity = 8 years; A similar caliber bond's YTM = 7%. What should be this bond's intrinsic value? 6. HCSH has the following preferred stock outstanding: dividend 6% (=$6); RRR = 7%. What's the maximum you will pay for this PS? 7. HCSH's common stock has just paid $1.00 in dividends. Nine years ago, it paid $.5 in dividends. The same growth rate is expected to continue for a long time. If the RRR on this stock is 12%, what is the intrinsic value? If this is also the equilibrium price, what is the market price of this stock? [To compute g, PV =.5, FV =$1, PMT =0; n=9; I/Y= growth rate=???]