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McGraw-Hill Ryerson
FIF T H
th
CANADIAN
EDI TI ON
Chapter 9
Present
value
concepts
Chapter 11
Chapters 12 and 13
Cost of
financing
to the firm
Analysis of
projects based
on cost of financing
to the firm
Valuation
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
EDI TI ON
Table 10-1
Bond price table
(10 Percent Interest Payment, 20 Years to Maturity)
Yield to Maturity
Bond Price
2% . . . . . . . . . . . . $2,308.11
4 . . . . . . . . . . . . 1,815.42
6 . . . . . . . . . . . . 1,458.80
Block
Hirt
Short
McGraw-Hill Ryerson
7
8
9
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
1,317.82
1,196.36
1,091.29
10
11
12
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
1,000.00
920.37
850.61
13
14
16
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
789.26
735.07
644.27
20
25
. . . . . . . . . . . .
. . . . . . . . . . . .
513.04
406.92
McGraw-Hill Ryerson Limited 2000
FIF T H
th
CANADIAN
EDI TI ON
Table 10-2
Impact of time to maturity on bond prices
Time Period
in Years
(of 10 percent bond)
0
1
5
. . . . . . . .
. . . . . . . .
. . . . . . . .
$1,000.00
1,018.52
1,079.85
$1,000.00
982.14
927.90
10
15
20
. . . . . . . .
. . . . . . . .
. . . . . . . .
1,134.20
1,171.19
1,196.36
887.00
863.78
850.61
25
30
. . . . . . . .
. . . . . . . .
1,213.50
1,225.16
843.14
838.90
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
EDI TI ON
Figure 10-2
Relationship between time to maturity and bond price*
Bond Price ($)
Assumes 8% yield to maturity
1,300
1,200
1,100
1,000
900
800
700
30
Block
Hirt
Short
25
15
5
Number of years to maturity
FIF T H
Block
Hirt
Short
th
CANADIAN
Foundations of Financial
Management
PPT 10-5
EDI TI ON
Table 10-3
An example of stock quotations from the Globe and Mail
FIF T H
th
CANADIAN
Foundations of Financial
Management
PPT 10-6
EDI TI ON
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
Chapter 10 - Outline
LT 10-1
Valuation Concepts
3 Factors that Influence the Required Rate of
Return
Valuation of Bonds
Relationship Between Bond Prices and Yields
Preferred Stock
Valuation of Common Stock
Valuation Using the Price-Earnings Ratio
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
Valuation concepts
LT 10-2
FIF T H
Block
Hirt
Short
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 10-3
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
Valuation of Bonds
LT 10-4
Block
Hirt
Short
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
Relationship Between
Bond Prices and Yields
LT 10-5
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 10-6
Preferred stock:
usually represents a perpetuity (something with no
maturity date)
has a fixed dividend payment
is valued without any principal payment since it has no
ending life
is considered a hybrid security
owners have a higher priority than common
shareholders
price is based upon PV of future dividends
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 10-7
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 10-8
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 10-9
Block
Hirt
Short