Question 1: Discuss the difference between the top-down and bottom-up approaches. What is the major assumption that causes the difference in these two approaches?
Question 2: What is the value to you of a 9 percent coupon bond with a par value of $10,000 that matures in 10 years if you require a 7 percent return? Use semiannual compounding.
Question 3: What would be the value of the bond in Problem 1 if you required an 11 percent rate of return?
Question 4: The Baron Basketball Company (BBC) earned $10 a share last year and paid a dividend of $6 a share. Next year, you expect BBC to earn $11 and continue its payout ratio. Assume that you expect to sell the stock for $132 a year from now. If you require 12 percent on this stock, how much would you be willing to pay for it?
Question 5: Given the expected earnings and dividend payments in Problem 4, if you expected a selling price of $110 and required an 8 percent return on this investment, how much would you pay for the BBC stock?