Question

XYZ has one share of stock and one bond. The total value of the two securities is $1,100. The bond has a YTM of 16.20 percent, a coupon rate of 9.60 percent, and a face value of $1,000; pays semi-annual coupons with the next one expected in 6 months, and matures in 3 years. The stock pays annual dividends that are expected to be $12.40 and paid in one year. What is the expected return for the stock?

a) 9.83%

b) 9.74%

c) 4.92%

d) 5.01%

e) none of the above

Answer 1

Step 1 - Calculate the price of the bond using PV function in excel:

Semi annual YTM or RATE = 16.20%/2 = 8.1%

Semi annual coupon = 9.60%/2 = 4.8%. Semi annual coupon or PMT = 1000*4.8% = 48

Face value or FV = $1000

Time = 3 years. NPER = 3*2 = 6

PV:

Price of stock = Total value - price of bond = $1100 - $847.91 = $252.09

Price of stock = D1 or Dividend next year/Required rate

252.09 = 12.40/Required rate

Required rate = 12.40/252.09 = 4.92%. Option C is the correct answer