Question

a. A company has stock which costs $43.25 per share and pays a dividend of $2.70 per share this year. The company's cost of equity is 8%. What is the expected annual growth rate of the company's dividends?

a. 5.28%

b. 1.76%

c. 3.52%

d. 7.04%

B. A bond has a$5,000 face value, ten years to maturity, and 6% semiannual coupon payments. What would be the expected difference in this bond's price immediately before and immediately after the next coupon payment?

a. $300

b. $75

c. $450

d. $150

Answer 1

A)

Dividend just paid(D1) = $2.70

Company's cost of equity(Ke) = 8%

Current Stock price(P0) = $43.25

calculating the Expected annual Constant growth rate:-

0.08 = 0.062428 + g

g = 0.0176 or 1.76%

So, the expected annual growth rate of the​ company's dividends is 1.76%

Option B

Q-B)

Face Valeu of Bond = $5000

Semi-annual Coupon payment = $5000*6%*1/2

= $150

- Bond Price before Coupon payment includes accrued interest. So, price before coupon payment will be Price of Bond plus semi-annual coupon paymnets

After coupon payment, the Price of bond gets reduced by semi-annual coupon payment as accrued interest is been paid.

Thus, the expected difference in this​ bond's price immediately before and immediately after the next coupon​ payment = Semi-annual coupon payment = $150

Option D