Question

 

Question 7 – Rates of Return on Stock [2 points]:

Nancy Cotton bought NuTalk for $12 per share. One year later, Nancy sold the stock for $21 per share, just after she received a $0.60 cash dividend from the company. What total return did Nancy earn? What was the dividend yield and the capital gains yield?

 

Question 8 - Constant growth valuation [2 points]:

A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10%, and the constant growth rate is g = 4.0%. What is the current stock price?

 

Question 9 - Constant growth rate [2 points]:

Gay Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the expected growth rate?

 

Question 10 – Bond yield [2 points]:

Suppose that you read in The Wall Street Journal that a bond has a par value of $100, a coupon rate of 9 percent, a price of $71.375, and pays interest annually. What would be the bond's current yield?

 

Answer 1

QUESTION 7:

  = $12

  =$21

D= $0.60

FORMULA:

DIVIDEND YIELD= (ANNUAL DIVIDEND PER SHARE/ CURRENT MARKET PRICE)* 100

DIVIDEND YIELD= ($0.60/ $21)*100

=2.8571%

CAPITAL GAIN YIELD=

= (21-12)/12

= 9/12 = 0.75 OR 75%

QUESTION 8:

DIVIDEND(D0) = $1.50

REQUIRED RATE OF RETURN(r) = 10%

GROWTH RATE(g) = 4.0%

FORMULA:

CURRENT MARKET PRICE=

= 1.50/(0.10-0.04)

=1.5/0.06

= $25

QUESTION 9:

DIVIDEND(D1) = $1.25

CURRENT MARKET PRICE(P1)=$32.50

REQUIRED RATE OF RETURN(r)=10.5%

FORMULA:

CURRENT MARKET PRICE=

32.50=1.25/(0.105-g)

(0.105-g)= 1.25/32.50

0.105-g =0.0385

0.105-0.0385=g

g=0.0665 or 6.65%

QUESTION 10:

PAR VALUE=$100

COUPON RATE=9%

BOND PRICE=$71.375

FORMULA:

ANNUAL COUPON PAYMENT= COUPON RATE* PAR VALUE OF BOND

=0.09*100 = $9

BONDS CURRENT YIELD= ANNUAL COUPON PAYMENT/ BOND PRICE

= 9/ 71.375

= 0.1261 OR 12.61%

* THE FIGURES ARE ROUNDED OFF AFTER 4 POINT OF DECIMAL