A $66 stock pays a dividend of $1.40 every 3 months, with the first dividend coming...

A $66 stock pays a dividend of $1.40 every 3 months, with the first dividend coming 3 months from today. The continuously compounded risk-free rate is 6%. What is the price of a prepaid forward contract that expires 6 months from today, immediately after the second dividend?

a. $65.19

b. $64.62

c. $63.26

d. $63.20

e. $63.37

Expert Solution

Current stock price = Spot price S = $66, Dividend in three months = $1.40, Dividends in 6 months = $1.40

We know the price of prepaid forward contract is equal to spot price less present value of all future dividends till the expiration of contract.

Price of prepaid forward contract takes into consideration all dividends that are received by the holder of the stock till the expiration of contract.Since the contract expires after 6 months. immediately after second dividend so dividend in 6 months will be considered for calculation of price of prepaid forward contract

Continuously compounded risk free rate = r = 6%

Present value of dividend = Dividend x e^-^rT

For dividend in three months T = 3/12, For dividend in 6 months T = 6/12

Now we get

Price of prepaid forward contract = Spot price - Present value of dividend in 3 months - Present value of dividend in 6 months

= 66 - 1.40e^-6%(3/12) - 1.40e^-^6%(6/12) = 66 - 1.40e^-0.015 - 1.40e^-0.03 = 66 - 1.40 x 0.985111 - 1.40 x 0.970445 = 66 - 1.37915 - 1.35862 = 63.26223 = 63.26 (rounded to two decimal places)

Hence price of prepaid forward contract = 63.26

jeff jeffy answered 2 years ago

A stock is expected to pay a constant dividend of $3/share every quarter (every 3 months)...

A stock is expected to pay a constant dividend of $3/share every quarter (every 3 months) and the first dividend is expected in exactly 1 year. If the market's required return on this stock is 11% PER YEAR, what is the market value of the stock today? [Express your final answer in dollars and cents (rounded to 2 decimal places)] Market Value = $ per share

McCool Air Conditioning Systems pays a dividend on its preferred stock every 6 months. Stock price...

McCool Air Conditioning Systems pays a dividend on its preferred stock every 6 months. Stock price today is $56.00. If the required rate of return is 8.5%, what is the semi-annual dividend paid by the company?

A stock currently trading at $115 pays a $4 dividend in three months and nine months....

A stock currently trading at $115 pays a $4 dividend in three months and nine months. An option on the stock with an exercise price of $105 expires in ten months. Annualized yield for T-bill for this option is 11% and annualized standard deviation (volatility) of the continuously compounded return on the stock is 17% per annum. (a) Compute adjusted stock price, S0″ (b) Compute d1 and N(d1) (c) Compute N(d2) assuming d2 is -.2897. Use this N(d2) in part...

What is the value of a dividend stock that pays a $3 dividend in yr 1,...

What is the value of a dividend stock that pays a $3 dividend in yr 1, a $3 dividend in yr 2, a $3.25 dividend in yr 3, then growing at 1% thereafter. TheWACC is 7% and the cost of equity is 9% A 47 b 35 c 49 d 37 2. I want to pull some cash out of my house by refinancing but I don’t want my pmt to increase. My initial mortgage was 200k and now the...

A stock pays a dividend of $50 at the end of the first year, with each...

A stock pays a dividend of $50 at the end of the first year, with each subsequent annual dividend being 5% greater than the preceding one. Mandy buys the stock at a price to earn effective annual yield of 10%. Immediately after receiving the 10th dividend, Mandy sells the stock for a price of P. Her effective annual yield over the 10-year period was 8%. Calculate P. (Answer $1,275.54)

What is the value of a stock which pays a $4 dividend/year (first dividend in one...

What is the value of a stock which pays a $4 dividend/year (first dividend in one year), not growing until year 10, then growing at 5% per year from year 10 to 11 and every year thereafter, if the discount rate is 10%?

At the end of every 3 months, Judy deposits $100 into an account that pays 6%...

At the end of every 3 months, Judy deposits $100 into an account that pays 6% compounded quarterly. After 4 years she puts the accumulated amount into a certificate of deposit paying 7.5% compounded semi-annually for 1 year. When this certificate matures how much will Judy have accumulated?

Meteora, Inc., has an issue of preferred stock outstanding that pays a dividend of $4.35 every...

Meteora, Inc., has an issue of preferred stock outstanding that pays a dividend of $4.35 every year, in perpetuity. This issue currently sells for $95 per share. What is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Consider a bond that pays a $500 dividend once a quarter. It pays in the months...

Consider a bond that pays a $500 dividend once a quarter. It pays in the months of March, June, September, and December. It promises to do so for 10 years after you purchase it (start in January 2019). You discount the future at rate r=0.005r=0.005 per month. a. How much do you value the asset in January 2019? b. Consider a different asset that pays a lump sum at its expiration date rather than a quarterly dividend of $500 dollars,...

Stock price = £60. In 2 months, two months the price will be either £66 or...

Stock price = £60. In 2 months, two months the price will be either £66 or £54. The risk-free interest rate is 10% p.a on a continuous compounding basis. What will be the value of a 2-month European put option with a strike price of £62? Please provide a step by step explanation as I would like to fully understand and not just copy the answer. Thank you :)

Question