Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of
ID: 2667886 • Letter: V
Question
Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year. You expect Von Bora's stock price to be $25.00 at the end of two years. Von Bora's equity cost of capital is 10%Suppose you plan to hold Von Bora stock for only one year. Calculate your total return from holding Von Bora stock for the first year
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually.
How much are each of the semiannual coupon payments? Assuming the appropriate YTM on the Sisyphean bond is 8.8%, then at what price should this bond trade for (3 POINTS)?
Assuming that this bond trades for $1,035.44, then the YTM for this bond is equal to
Explanation / Answer
1st year expected dividend per share = $1.40
2nd year expected dividend per share = $1.50
Stock Price at the end of two years = $25
Cost of Equity capital = 10%
Total Return = Capital Gain + Dividend Yield
Capital Gain = [(P1 – P0) / P0]
Dividend Yield = [Current year dividend payment / Current year stock price]
Total Return = Capital Gain + Dividend Yield
Stock value (P0) = [(D1 / {1+R}) + (D2 + P1) / (1+R)2]
Stock Value (P0) = [($1.40 / {1+0.10}) + ($1.50 + $25) / (1+0.10)2]
Stock Value (P0) = [$1.2727 + ($26.50 / 1.21]
Stock Value (P0) = [$1.2727 + $21.90]
Stock Value (P0) = $23.17
Stock Value (P1) = [(D2 + P2) / 1.10]
Stock Value (P1) = [($1.50 + $25) / 1.10]
Stock Value (P1) = $24.10
Capital Gains Yield = [$24.10 - $23.17) / $23.17]
Capital Gains Yield = 0.04 (or) 4%
Dividend Yield = [$1.40 / $23.17]
Dividend Yield = 0.06 (or) 6%
Total Return = [0.04 + 0.06]
Total Return = 10%
Face value of the bond = $1,000
Number of years to maturity of the bond = 15 years
Coupon rate of the bond = 8% (Semi-annual coupon payments)
Yield to Maturity of the bond (YTM) = 8.8%
Calculating Current Bond Price (PV):
(Using Ms-Excel "PV" Function):
Yield to Maturity (or) Interest Rate (Rate)
8.8% / 2
Number of Maturity Periods (Nper)
15*2
Semi-annual Coupon Payment (PMT) [$1,000 * (8% / 2)]
-40
Par Value (or) Face Value of the bond (FV)
-1000
Current Market Value of the bond (PV)
$934.07
Current Price of the bond trades (PV) = $934.07
Assuming that this bond trades for $1,035.44, then the YTM for this bond is equal to:
Calculating Yield to Maturity of the bond (YTM):
Using Ms-Excel "Rate" Function):
Number of Maturity Periods (Nper)
15*2
Semi-annual Coupon Payment (PMT)
-40
Current Trading Price of the bond (PV)
1035.44
Par Value (or) Face (or) Future Value of the bond (FV)
-1000
Semi-annul Coupon Rate
3.80%
Annual Coupon Rate [3.80% * 2]
7.60%
Calculating Current Bond Price (PV):
(Using Ms-Excel "PV" Function):
Yield to Maturity (or) Interest Rate (Rate)
8.8% / 2
Number of Maturity Periods (Nper)
15*2
Semi-annual Coupon Payment (PMT) [$1,000 * (8% / 2)]
-40
Par Value (or) Face Value of the bond (FV)
-1000
Current Market Value of the bond (PV)
$934.07
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