Question

In: Finance

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?

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?

Expert Solution

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.

Junaid answered 2 years ago

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