20) You want to donate $200,000 to a school to set up a scholarship that will pa
ID: 2758513 • Letter: 2
Question
20) You want to donate $200,000 to a school to set up a scholarship that will pay $5,000 a year forever. What rate of return will be needed on this donation to provide the scholarship?
A. 2.5%
B. 5.0%
C. 10%
D. 25%
E. 50%
22) Wheels & Deals, Inc. offers a 7% coupon bond with semiannual payments and a yield to maturity of 7.73%. The bonds mature in 9 years. What is the market price of a $1,000 face value bond?
A. $953.28
B. $963.88
C. $1,108.16
D. $1,401.26
E. $1,401.86
24) Fruit Phones recently paid a $2.50 annual dividend on its common stock. This dividend increases at an average rate of 4% per year. The stock is currently selling for $52.00 a share. What is the market rate of return? A. 2.5%
B. 4.0%
C. 5.0%
D. 6.0%
E. 9.0%
Explanation / Answer
20) A=2.5% PVAforever= R/i 200000=5000/i =I =5000/200000=2.50%
24) Market Rate of Return= Ke=D/V+g D=dividend V=current price g=dividend increasing rate
2.50/52 +0.04 =8.8%
22) Formula to know the market price = YTM= C+[{(F-P)/2}n*2]/F+P/2
7.73% = 7%+(1000-p/2)9*2 /1000+p/2 => 7.73%(1000+2)=(7%+9000-9p)*2
=>0.0773p+18p=0.14+18000-77.3 =>18.0773p=17922.84
=>p=991.45
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