The bonds issued by Sota Inc. bear a 6.5 percent coupon, payable semiannually. The bond matures in 14 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to maturity?
The common stock of Pizzaria pays an annual dividend that is expected to increase by 8 percent annually. The required rate of return on the stock is 12 percent and sells for $70.50 a share. What is the expected amount of the next dividend to be paid on Pizzaria’s common stock?
| 1) | When the bond sells at face/par | ||||||||
| value for any given coupon bond, the yield to maturity is equal to the coupon rate. | |||||||||
| The bonds issued by Sota Inc. will have a yield to maturity of 6.5% because the bonds | |||||||||
| bear a 6.5 percent coupon and are selling at par. | |||||||||
| 2) | According to the dividend growth model. | ||||||||
| P0 = D1/(R-g) | |||||||||
| P0 is the price of the stock that is $70.50. | |||||||||
| D1 is the next dividend amount. | |||||||||
| R is the required return on the stock that is 12%. | |||||||||
| g is the growth rate of the dividend that is 8%. | |||||||||
| 70.50 = D1/(.12 - .08) | |||||||||
| 70.50 = D1/(.04) | |||||||||
| D1 = 70.50*.04 | |||||||||
| D1 = 2.82. | |||||||||
| The expected amount of the next dividend to be paid on Pizzaria’s common stock | |||||||||
| is $2.82. |
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