$710.99 1 po QUESTION 14 A stock is expected to pay a dividend of $2.00 each yea

Question

$710.99 1 po QUESTION 14 A stock is expected to pay a dividend of $2.00 each year for the next 3 years, after that the dividend is expected to grow at a constant rate of 7% per year forever. The stock s required rate of return is 10%. What is intrinsic value of the stock today? $58.57 $21.05 $53.70 $71.33 None of these QUESTION 15 How much are you willing to pay for a 6% annual coupon bond with a 4.5% yield which comes due in 12 years? Click Save and Submit to save and submit. Click Save All Answers to save all answers. Save All Answers

Explanation / Answer

Q14 Year--> 0 1 2 3 Dividend 2 2 2 Growth rate after 3 years 7% Required rate of return 10% So let us first find the value of the perpetuity after 3 years. The formula used is D3*(1+growth rate)/(Required rate of return - Growth rate) Value at year 3 71.33 Total cash flow 2 2 73.33 Total cash flow is calculated by adding the value at year 3 plus the dividend and for year 1 and 2 it will be 2 only Now we will calculate the net present value of all the three values in year 1,2 and 3 and that will be intrinsic value Intrinsic value 58.57 NPV can be calculated by either using excel function NPV or using the formula (cash flow for year i/(1+required return)^i Where I is for year and casf flow as calculated above Q15 Coupon rate 6% Yield 4.50% Maturity period 12 Face value 1000 Assuming Year 0 1 2 3 4 5 6 7 8 9 10 11 12 Cash flow 60 60 60 60 60 60 60 60 60 60 60 1060 Assuming face value of the bond is 1000, so every year cash flow will be coupon rate*Face value and at maturity it will be coupon rate*Face value plus the face value Now we will calculate the net present value of all the values from year 1 to 12 and that will be the price Price 1,136.78 NPV can be calculated by either using excel function NPV or using the formula (cash flow for year i/(1+required return)^i Where I is for year and casf flow as calculated above Yield will be used as the rate of return

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