Question

45.

A) In one year, Bold Betties Inc. will pay a $5 per share dividend and it is expected to grow by 4 percent per year. If the required return on this stock is 14 percent, what is the current stock pric

B) Suppose you buy a 15 year 4% bond for $940. What is the yield to maturity for this bond? State your answer as a percentage, X.XX%.

C) Suppose you purchase a 20-year 5% bond for $980. If you hold the bond for 5 years and sell it $1040, what was your realized holding period yield? State your answer as a percentage, X.XX%.

(please post equations needed along with answers)

Answer 1

a) Calculating the Current Price of Stock(P0):-

P0 = D1/(Ke-g)

where, D1 = Dividend in 1 years = $5

g = growth rate of dividend = 4%

ke = Required return = 14%

P0 = $5/(0.14-0.04)

P0 = 50

So, the Current Price of Stock is $50

b). Calculating the Yield to maturity using the Excel "RATE" function:-

SO, the yield to maturity for this bond is 4.56%

C). Purchase Price of Bond = $980

Selling Price of Bond after 4 years = $1040

5- Year Coupon Payment received = $1000*5%*4 years = $200

Calculating Realized Holding Period Yield:-

Realized Holding Period Yield = [(Selling Price - Purchase Price)+ Total Coupon Income]/Purchase Price

Realized Holding Period Yield = [($1040 - $980) + $200]/$980

Realized Holding Period Yield = 26.53%

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