Question

A stock is expected to pay a dividend of $1 at the end of the year. The required rate of return is r_s = 11%, and the expected constant growth rate is 5%. What is the current stock price?

Select one:

a. $16.67

b. $18.83

c. $21.67

d. $23.33

e. $20.00

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

Select one:

a. Maximize its expected total corporate income

b. Maximize its expected EPS

c. Minimize the chances of losses

d. Maximize the stock price per share over the long run which is the stocks's intrinsic value.

e. Maximize the stock price on a specific target date

Leggio Corporation issued 20-year, 7% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds has dropped to 6%. What is the new price of the bonds, given that they now have 19 years to maturity?

Select one:

a. $1,046.59

b. $1,111.58

c. $1,133.40

d. $1,177.78

e. $1,189.04

Answer 1

Answer 1
Using dividend discount growth model formula, we can calculate the current stock price
Stock price = D1 / (r - g)
D1 = Expected dividend at the end of the year = $1
r = required rate of return = 11%
g = growth rate = 5%
Stock price = $1 / (0.11 - 0.05)
Stock price = $16.67
Answer 2
The answer is Option b.
The primary operating goal of a publicly-owned firm interested in serving its stockholders should
be to maximize its expected EPS i.e.Earnings per share
Answer 3
Bond price = Present value of future coupon payments + Present value of Bond par value
Coupon payment per year = $1000 * 7% = $70
Using present value of annuity formula , we can derive the present value of future coupon payments
Present value of annuity = P * {[1 - (1+r)^-n]/r}
Present value of annuity = present value of coupon payments = ?
P = coupon payment per year = $70
r = market interest rate = 6%
n = no.of years to maturity = 19
Present value of annuity = 70 * {[1 - (1+0.06)^-19]/0.06}
Present value of annuity = 70 * 11.15812 = $781.07
Present value of future coupon payments = $781.07
Present value of par value of bond = Par value * discount factor of 19th year @ 6%
Present value of par value of bond = $1000 * [1/1.06^19]
Present value of par value of bond = $1000 * 0.330513 = $330.51
Bond price = $781.07 + $330.51 = $1,111.58
The answer is option b.