Question

1. You have recently decided to create an investment portfolio. You have been told that a “standard” portfolio for someone in your age range is 80% equity and 20% debt. Thus, you have specifically honed in on three specific assets that you are going to use:
Common Stock A: Firm is expected to pay $5 next year in dividends, with an expected growth rate of 10% for the following three years after that, followed by 2% forever after that. The firm has a required rate return of 8%.
Common Stock B: Firm just paid a current dividend of $2 and expect constant growth rate of 5% forever and a required return of 12%.
Coupon Bonds C: Bonds have a yield-to-maturity of 4.9%, compounded semi-annually, with 17 years left until maturity. The face value is $1,000 and the coupon rate is 5.5%.
You have $250,000. You will split the equity component equally between the two stocks. Given this, how many shares of stock and bonds would you buy? You may round to the nearest whole unit. (20 pts)
Common Stock A: _________ Common Stock B: __________ Bonds C: __________

Answer 1

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