1. A stock has just paid a dividend and has declared an annual dividend of $2.00
ID: 2655462 • Letter: 1
Question
1. A stock has just paid a dividend and has declared an annual dividend of $2.00 to be paid one year from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar stocks is 12%. What is P0?
2. A given bond has 5 years to maturity. It has a face value of $1,000. It has a YTM of 6% and the coupons are paid semiannually at a 10% annual rate. What does the bond currently sell for?
3. A bond currently sells for $887 even though it has a par of $1,000. It was issued two years ago and had a maturity of 10 years. The coupon rate is 7% and the interest payments are made semiannually. What is its YTM?
1. A stock has just paid a dividend and has declared an annual dividend of $2.00 to be paid one year from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar stocks is 12%. What is P0?
Explanation / Answer
1. p0= D1/(r-g) = 2/ (.12-.05) = $ 28.57
2. current price of bond= 50/(1.030)^1+ 50/(1.030)^2+ 50/(1.030)^3+ 50/(1.030)^4+.................................1000+50/(1.030)^10
= $ 1037.204
3. Bond price= 887
Face value= 1000, years to mature(t)= 8, coupon rate= 7 %, coupon payment= 70
YTM= {C+ (F-P) /8} / {(F+P)/2}
= {70 + (1000-887)/8}/ {(1000+887)/2}
YTM= 8.92 %
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