3) Disney Corp has a 7 year, 6.95% coupon bond that is currently selling for 978

Question

3) Disney Corp has a 7 year, 6.95% coupon bond that is currently selling for 978.65. Assume that coupon payments are annual. What is the yield-to-maturity of this bond? (USE excel) 4) Hayworth Industries does not currently pay dividends; however, investors expect that ?n four years, the firm will pay its first dividend of $1.50 per share. From that point onwards, the dividend is expected be $2 annually forever. Assume that investors required rate of return is 13%. What should the price of Hayworth Industries be today? 5) Last year, IBM paid a dividend of $1.50 per share. Investors think that IBM's dividend will grow at 10% for the next four years. After that, the dividend will be constant at $4. What should be the price per share of IBM? Question 5, interest rate is 8%.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Nper = 7 (indicates period)

PV = 978.65 (indicates current price)

FV = 1000 (indicates face value)

PMT = 1000*6.95% = 69.50 (indicates annual interest payment)

Rate = ?(indicates YTM)

YTM = Rate(Nper,PMT,PV,FV) = Rate(7,69.50,-978.65,1000) = 7.35%

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Part B:

Price of Hayworth = 1.50/(1+13%)^4 + 2/(13%) = $16.30

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Part C:

Price of IBM = 1.50*(1+.10)^1/(1+8%)^1 + 1.50*(1+.10)^2/(1+8%)^2 + 1.50*(1+.10)^3/(1+8%)^3 + 1.50*(1+.10)^4/(1+8%)^4 + 4/8% = $56.28

Thanks.

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