a. Spencer Co.'s common stock is expected to have a dividend of $6 per share for each of the next eight years, and it is estimated that the market value per share will be $139 at the end of eight years. If an investor requires a return on investment of 8%, what is the maximum price the investor would be willing to pay for a share of Spencer Co. common stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. Mario bought a bond with a face amount of $1,000, a stated interest rate of 10%, and a maturity date seventeen years in the future for $981. The bond pays interest on an annual basis. Three years have gone by and the market interest rate is now 8%. What is the market value of the bond today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c. Alexis purchased a U.S. Series EE savings bond for $100, and eight years later received $185.08 when the bond was redeemed. What average annual return on investment did Alexis earn over the eight years?
A) Maximum price the investor would be willing to pay | |||||||||||
=6*cumulative present value for 8 years @8%+$139*present value factor for 8th year @8% | |||||||||||
6*5.74+139*0.540 | |||||||||||
34.44+75.06 | |||||||||||
$ 109.50 | |||||||||||
b) the market value of the bond today | |||||||||||
maturity period of bond now = 17-3yrs= 14years | |||||||||||
Market value of bond = $1000*10%*cumulative pv factor of 14 years @8%+1000* present value factor of 14th year @8% | |||||||||||
100*8.24+1000*0.340 | |||||||||||
824+340 | |||||||||||
$ 1,164.00 | |||||||||||
c) Average annual return on investment over 8 years | |||||||||||
total return on investment earned over 8 years = ( $185.08-100)/100 | |||||||||||
85.08/100 | |||||||||||
0.8508 | |||||||||||
i.e 85.08% | |||||||||||
Annual return on investment earn over the 8 years = 85.08/8 | 10.635 | ||||||||||
Annual return on investment earn over the 8 years = 85.08/8 | 10.64% | ||||||||||
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