You are the Asset-Liability manager for a major bank holding company, and are co

Question

You are the Asset-Liability manager for a major bank holding company, and are considering purchases for the institution's bond portfolio. The company is in the 35% tax bracket. You are comparing between a U.S. Government Bond with a coupon rate of 8.25%, and a municipal Bond with a 6.50% coupon. You conclude that interest income would be maximized by purchasing the municipal bond; you are correct.

A) True

B) False

2) XYZ Corporation recently paid a dividend of $2.19 to its shareholders, and announced that it expected dividends to be 2% higher next year. What should you pay for a share of XYZ Corporation's stock, if current long-term interest rates are 4%?

Explanation / Answer

B) False

2--- GG model- Share price is calculated as P = D(1+g)/k-g, where
D=most recent dividend paid
g=dividend growth rate
k=expected return

So, P = $2.19(1.02)/(.04-.02)
P = $2.23/.02
P = $111.50

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