In: Finance
a. The market price of a semi-annual pay bond is $987.44. It has 10.00 years to maturity and a coupon rate of 7.00%. Par value is $1,000. What is the effective annual yield?
b. A firm just paid a dividend of $2.79. The dividend is expected to grow at a constant rate of 2.75% forever and the required rate of return is 12.00%. What is the value of the stock?
a)
b) Calculation value of stock -
Value of stock is the present value of stock dividend's to be receive in future.
We can use following formula to calculate stock value-
Po = D1 / (Ke-g)
Where,
Po = Current value of stock
D1 = Expected dividend in next year = $2.79*1.0275 = $2.866725
g = Growth Rate = 2.75% = 0.0275
Ke = Required Rate of Return = 12% = 0.12
= $2.866725 / (0.12-0.0275)
= $2.866725 / 0.0925
= $30.99
Value of stock is $30.99.
a. Effective annual yield is 7.31%.
b. Value of stock is $30.99.