11.) Collingwood Homes has a bond issue outstanding that pays a 6.0% semi-annual
ID: 2783909 • Letter: 1
Question
11.) Collingwood Homes has a bond issue outstanding that pays a 6.0% semi-annual coupon and matures in 15 years. The bonds have a par value of $1,000 and a market price of $975.00 What is the Yield to Maturity of this bond? What is the Current Yield of this Bond? What is the Capital Gain Yield of this Bond? If you expect inflation to be 29%lyear over the life of the bond, what is the expected Exact Real Rate of Return on this investment? 12.) Miller Brothers Hardware paid an annual dividend of $1.00 per share last month. Today, the company announced that future dividends will be increasing by 2.0% annually based on that dividend. If you require a 12 percent rate of return, how much are you willing to pay to purchase one share of this stock today? 13.) IJ Airlines paid an annual dividend of $1.00 a share last month. The company is planning on paying $1.50, $2.00, and $2.50 a share dividend the end of the next 3 years, respectively. After that it plans to increase future dividends by by 3%year . What is the market price ofthis stock if the required rate of return is l 3.096 percent? You may use the template below to compute your answer Stock Price 3 of 8Explanation / Answer
Approximate Yield to maturity = interest+(par value-market value)/ years to maturity / (Par value+market value)/2
YTM = 30+(1000-975)/30 / (1000+975)/2
YTM = 30.8333/ 987.5 = .03122
Approximate YTM = .03122*2*100 = 6.2447 = 6.24%
Current Yield on bond =(interest/market price)*100
=(30/975) = .03076*2*100 = 6.15%
Capital gain Yield = (market price-par value)/par value
[(975-1000)/1000]*100 = -2.5%
real rate of return = nominal rate -inflation rate
YTM-inflation rate = 6.24-2 = 4.24%
2-value of stock = expected dividend/(required rate of return-growth rate)
expected dividend = 1*(1.02) =1.02
value of stock = 1.02/(12%-2%) = 10.2
present value of stock today = fv/(1+r)^n = 10.2/(1.12) = 9.107 = 9.11
13-
Year
expected dividend
0
1
1
1
1.5
1.5
2
2
2
3
2.5
2.5
4
2.5*1.03
2.575
value of stock
expected dividend/(require return-growth rate)
2.575/(13%-3%)
terminal valueof stock
25.75
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r = 13%
1
1.5
1.327434
2
2
1.566293
3
2.5
1.732625
3
25.75
17.84604
present Value of stock
22.47239
Year
expected dividend
0
1
1
1
1.5
1.5
2
2
2
3
2.5
2.5
4
2.5*1.03
2.575
value of stock
expected dividend/(require return-growth rate)
2.575/(13%-3%)
terminal valueof stock
25.75
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r = 13%
1
1.5
1.327434
2
2
1.566293
3
2.5
1.732625
3
25.75
17.84604
present Value of stock
22.47239
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