Question

1. Nasco Biscuits paid a dividend of $2 today. The shares of Nasco are expected to grow at 1% with a required return of 3%. Also, Nasco, is issuing a 5-year bond with a $1,000 face value that pay a coupon of 5% per annum with a yield to maturity of 4%. The coupons are paid semi-annually. What is the price of Nasco shares and the price of its bond? Show calculations.

A. $100.00, $956.24

B. $101.00, $1,041.91

C. $101.00, $1,044.52

D. $66.66,$956.24

Answer 1

B. $101.00, $1,041.91

Price of stock is the present value of dividends.

Price of bond is the present value of cash flows from bond.

a.	Price of stock	=	D0*(1+g)/(Ke-g)
		=	$2.00*(1+0.01)/(0.03-0.01)
		=	$101.00
	Where,
	D0	=	$2.00
	g	=	1%
	Ke	=	3%
b.	Price of bond		=-pv(rate,nper,pmt,fv)
			=$ 1,044.91
	Where,
	rate	=	4%/2	=	0.02
	nper	=	5*2	=	10
	pmt	=	1000*5%*6/12	=	$25.00
	fv			=	$1,000.00