Question

F.E

9.If your stock pays a dividend D_{0 =} $0.75 at t = 0.and will experience a constant growth of 6.4 percent forever into the future, what should be the price of the stock if the required return for such stocks is 10.5 percent? Note: The dividend shown above is at t = 0, not t=1.    Answer to the nearest cent, xxx.xx and enter without the dollar sign.

10.What is the price of a 13-year bond paying 9.5% annual coupons with a face (par) value of $1,000 if the market rates for these bonds are 6.1%? Answer to the nearest cent, xxx.xx, and enter without the dollar sign.

Answer 1

9.Current price=D1/(Required return-Growth rate)

=(0.75*1.064)/(0.105-0.064)

=19.46(Approx)

10.Annual coupon=1000*9.5%=95

Hence price of bond=Annual coupon*Present value of annuity factor(6.1%,13)+1000*Present value of discounting factor(6.1%,13)

=95*8.80119832+1000*0.463126902

=1299.24(Approx)

NOTE:

1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=95*[1-(1.061)^-13]/0.061

=95*8.80119832

2.Present value of discounting factor=1000/1.061^13

=1000*0.463126902