Demonstrate your understanding of financial concepts by completing the following

Question

Demonstrate your understanding of financial concepts by completing the following problems. Where appropriate, show or explain your work.

Problem 1. Calculate the bond yield in the following scenario: Two years ago, Walters Electronics Corporation issued 20-year bonds at a coupon rate of 6.75 percent. The bonds make semiannual payments, and currently sell for 106 percent of par value. Calculate the YTM.

Problem 2. Calculate the stock value in the following scenario: The next dividend payment by RST, Incorporated will be $3.45 per share. The dividends are projected to sustain a 6.50 percent growth rate into the future. If RST stock currently sells for $67 per share, what is the required return?

Problem 3. Calculate the stock value in the following scenario: Nickels Corporation will pay a $3.10 per share dividend next year. The company plans to increase its dividend by 4.25 percent per year, indefinitely. How much will you pay for the company's stock today if you require a 12 percent return on your investment?

Explanation / Answer

Problem 1

Current price =106

Coupon rate =6.75%

Time left =18

semia annual tiem period = 18*2 =36

Semi annual bonds = 0.0675/2*100 =3.375

YTM wpuld be the IRR on cashflows or can be calculate in excel like this

=RATE(36,-3.375,106,-100,0,0) =3.1%

YTM = 3.1%*2 = 6.2%

Problem 2

r = 3.45/67 + 6.5%

=11.65%

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