Question

1. The next dividend payment by A Company will be $1.73 per share. The dividends are anticipated to maintain a 0.06% growth rate forever. If the stock currently sells for $16.44 per share, what is the investors' required return rate? (Round the final answer to 4 decimal places.)

(Please Note: percentage is expressed in decimals in all questions, e.g. 14% is expressed as 0.14%)

2.

You have an 0.066% semiannual-pay bond with a face value of $1,000 that matures in 11 years. If the yield is 0.09%, what is the price of this bond? Round your answer to 2 decimal points.

(Please note the percentage is express in decimals in this question, e.g. 14% is expressed as 0.14%)

Answer 1

1)

Required rate of return = (Next year dividend / price) + growth rate

Required rate of return = (1.73 / 16.44) + 0.06

Required rate of return = 0.10523 + 0.06

Required rate of return = 0.1652 or 16.52%

2)

Number of periods = 11 * 2 = 22

Semi annual rate = 9% / 2 = 4.5%

Semi annual coupon = [(6.6 / 100) * 1000] / 2 = 33

price of bond = Coupon * [1 - 1 / (1 + rate)^time] / rate + Face value / (1 + rate)^time

price of bond = 33 * [1 - 1 / (1 + 0.045)^22] / 0.045 + 1000 / (1 + 0.045)^22

price of bond = 33 * [1 - 0.3797] / 0.045 + 379.70089

price of bond = 33 * 13.78442 + 379.70089

price of bond = $834.59