Question

# XYZ has ine share of stock and one bond. The total value of the teosecurities is...

XYZ has ine share of stock and one bond. The total value of the teosecurities is \$1,100. The bond has a YTM of 12.60 percent,a coupon rate of 9.60 percent, and a face value of \$1000; 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 grow by 4.82 percent per year forever. The next dividend is expected to be \$13.40 and paid in one year. What is the expected return for the stock?

We have to find the price of the bond using PV function in EXCEL

Please note that the payments are semi-annual

=PV(rate,nper,pmt,fv,type)

rate=12.6%/2=6.3%

nper=3 years*2=6

pmt=semi-annual coupon=(coupon rate*face value)/2=(9.6%*1000)/2=96/2=48

fv=face value=1000

=PV(6.3%,6,48,1000,0)=\$926.93

==> price of the bond=\$926.93

Total value of one sahre+one bond=1100

One sahre value=1100-926.93=173.07

Expected return on Stock=(Dividend next year/Share value)+growth rate=(13.4/173.07)+4.82%=7.74%+4.82%=12.56%

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