Step by step Solution please. Thanks United Metal Fabrication stock does not now

Question

Step by step Solution please. Thanks

United Metal Fabrication stock does not now pay dividends. Investors expect that it will begin paying a dividend of S2.00/share in exactly 5 years at time 5. That is, they forecast that D5 will be $2.00/share. Investors expect that the dividend will then remain at that level of S2.00/share forever after that. They require a return of 13.00% on this stock. What is the value of this stock today based on the discounted dividend model? a) $8.35 b) $10.66 c) S9.44 d) $13.61 e) $15.38 old Fashioned Curtain and Drapes Corporation's bonds have a face value of S1,000 and a 10% coupon paid semiannually; the bonds mature in 5 years. What current yield would be reported in The Wall Street Journal if the yield to maturity is 15%? 1.2071% b) 1.3607% c) 1.8990% d) 12.0715% e) 6.0357%

Explanation / Answer

1. D5 = $2

r = 13% or 0.13

Thus, P4 (price at the end of year 4) = dividend expected in year 5/r = $2/0.13 = 15.3846 (as per the dividend discount model)

Value of the stock today = P4/(1+r)^4 = 15.3846/1.13^4 = $9.44

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