Business finance 1) Beck Co. stock currently sells for $50 per share. The next e

Question

Business finance

1) Beck Co. stock currently sells for $50 per share. The next expected annual dividend is $2, and the growth rate is 6%. What is the expected rate of return on this stock? If the required rate of return on this stock were 12%, what would the stock price be, and what would the dividend yield be?

2)What is the price of a $1,000 par value bond with a 6% coupon rate paid semiannually, if the bond is priced to yield 5% and it has 9 years to maturity? What would be the price of the bond if the yield rose to 7%?

3) An investment will provide you with $100 at the end of each year for the next 10 years. What is the present value of that annuity if the discount rate is 8% annually? What is the present value of the above if the payments are received at the beginning of each year?

4) You have $10,000 to invest for five years. How much additional interest will you earn if the investment provides a 5% annual return, when compared to a 4.5% annual return?

Explanation / Answer

1)

Formula:

P= D1/(Ke-g)

50= 2/(Ke-.06)

Ke= (2/50)+.06

Ke= .1 or 10%

Ke= 10%

If the required rate of return on this stock were 12%,

P= 2/(.12-.06)

P= 2/.06

P= $33.33

dividend yield = dividend/price

dividend yield= 2/50= 4%

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