Question

Your Aunt Weezie has asked you to calculate the value of her portfolio that consists of 20 shares of stock and 1 bond listed below. What is the value of twenty shares of Numbers and one bond of Letter (you must show your work in calculating the values)?

a) 20 shares of Numbers, Inc. common stock. Numbers will pay its first dividend 6 years from today in the amount of $8 per share. Over the next year (the 7th year), the dividend will grow by 20% after which the growth rate would be a constant rate of 2%, forever. The appropriate discount rate for Number’s stock is 12%.

b) 1 bond of Letters Corp. Each bond makes semiannual coupon payments of $35, has a face value of $1000, has 4 years remaining to maturity, and is priced to reflect an annual YTM of 6.2%.

Answer 1

Solution:-

Value of 1 Share of Numbers:-

Period	Discounting @12%	Amount	PV
1 to 5	-	0	0
6	0.506631121	$8	4
7	0.452349215	$9.6	4
8	0.403883228	$ 97.92 (Note-1)	40
			$48

Note 1- Using Gordons formula:-

Dividend Payable/ Ke-g

($9.6 X 1.02)/0.12-.02

$9.792/ 0.1

$97.92

Here K is Kost of equity and g is growth rate given.

Thus Price of 20 shares= 20 X 97.92= $1958.4

Value of 1 Bond:-

Period	Discounting @6.2/2= 3.1%	Amount	PV
0 Year	0	$35	0
0.5 Year	0.970	$35	34
1 year	0.941	$35	33
1.5 Year	0.912	$35	32
2 Year	0.885	$35	31
2.5 Year	0.858	$35	30
3 Year	0.833	$35	29
3.5 Year	0.808	$35	28
4 Year	0.783	$1035	811
			$1028

Thus Value of Portfolio= $+1958.4+$1028= $2986.4