Question

1. You just purchased a bond that matures in 15 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield of 8.37%. What is the bond's yield to maturity? Round your answer to two decimal places.

2. Boehm Incorporated is expected to pay a $2.60 per share dividend at the end of this year (i.e., D1 = $2.60). The dividend is expected to grow at a constant rate of 10% a year. The required rate of return on the stock, rs, is 17%. What is the estimated value per share of Boehm's stock? Round your answer to the nearest cent.

Answer 1

1.Information provided:

Face value= future value= $1,000

Time=15 years

Current yield= 8.37%

Coupon rate= 8%

Coupon payment= 0.08*1,000= $80

The question is solved by first calculating the current value of the bond.

Current yield is calculated using the below formula:

Current Yield= Annual interest/Current price

8.37= $80/ Current price

Current price= $80/ 0.0837

                          = $955.79.

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -955.79

N= 15

PMT= 80

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 8.53.

Therefore, the yield to maturity is 8.53%.

2. Information provided:

Current dividend payment= $2.60

Dividend growth rate= 10%

Required rate of return= 17%

The question can be solved using dividend discount model.

Price of the stock today= D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

                      

Price of the stock today= $2.60*(1 + 0.10)/ 0.17 – 0.10

                                             = $2.86/ 0.07

                                             = $40.8571.

Therefore, the value of Boehm’s stock is $41.

In case of any query, kindly comment on the solution.