Question

1. An issue of common stock s most recent dividend is $1.75. Its growth rate is 5.7 %. What is its price if the market s rate of return is 7.7 %?

       a. $24.63   b. 87.50   92.50 d. none of these options

2. An issue of common stock is selling for $ 57.20. The year end dividend is expected to be $2.32, assuming a constant growth rate of 4 %, what is the required rate of return?    a. 10.3 %    b. 10.1 % c. 8.1 %        d. none of these options

3. The relationship between a bond s price and the yield to maturity:

a. change at a constant level for each percentage change of yield to maturity

b. is an inverse relationship

c. is a linear relationship

d. change at a constant level for each percentage change of yield to maturity and is an inverse relationship

Answer 1

1. c) 92.50

(Recent Dividend (D₀) = $ 1.75

Growth rate (g) = 5.7%

Expected Dividend (D₁) = 1.75 + (1.75 x 5.7%) = $ 1.85

Market rate of return (Re) = 7.7%

Stock Price (P₀) = [D₁ / (Re - g)] = 1.85 / (0.077 - 0.057) = $ 92.50)

2. c) 8.1%

(Stock Price (P₀) = $ 57.20

Expected Dividend (D₁) = $ 2.32

Growth rate (g) = 4%

Required rate of return (Re) = (D₁ / P₀) + g = (2.32 / 57.20) + 0.04 = 8.1%)

3. b) is an inverse relationship

(There is an inverse relationship between market price of the bond and its yield to maturity. The higher the market price, the lower the return and the lower the market price the higher the return in bond.)

answered by: anonymous