4. Large Industries annual bonds are selling at 102 (i.e., the price is $1,020 f

Question

4. Large Industries annual bonds are selling at 102 (i.e., the price is $1,020 for the $1,000 bond). There are 6 years remaining until maturity on the bonds and the yield to maturity is 5.75%. Find the coupon rate. (Note: you may have to use a trial and error solution method)

6. You have forecast that United Sports, Inc. will pay a dividend of $.50 next year (in time 1), $.80 two years from now (in time 2) and $1.20 three years from now (in time 3). For dividends beyond three years, you assume they will increase at 5% per year from the prior year. If the discount rate is 9%, calculate a fair price for the stock of United Sports, Inc.

Explanation / Answer

4)YTM={Interest+([Face value-Current price]/number of years)}/[Face value+current price]/2

Or 0.0575=Interest+([1000-1020]/6)/(1000+1020/2)

Or 0.0575*1010=Interest-3.33

Or Interest=61.41

Or rate of interest=6.141%

6)Fair value of the stock:

Present value of future cash flows

=0.50/1.09+0.8/(1.09)^2+1.2/(1.09)^3+1.26/(0.09-0.05)/(1.09)^3

=$26.38

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.