Question

You find a stock that has announced that it will pay its first dividend of $4.65...

You find a stock that has announced that it will pay its first dividend of $4.65 in eight years and then grow the dividend at 4.5% afterward. If you require a return of 18%, what is the most you would be willing to pay for the stock today? A. $8.73 B. $9.16 C. $34.44 D. $11.30 E. $10.81

If a bonds rating is upgraded from CC to CCC, what will happen to the price and yield of the bond? A. The price and yield will both rise B. The price will fall and the yield will rise C. The price will rise and the yield will fall D. The price and yield will both fall

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Homework Answers

Answer #1

Question 1: Option E

Based on the basic time value of money,

FV = PV * (1 + r)n

34.44 = PV * (1 + 0.18)7

34.44 = PV * 3.185474

PV = $10.81 --> Price of share today (Option E)

Question 2: Option C

When the credit rating of the bond is upgraded, the risk associated with the bond would decrease. This implies the yield on the bond would fall.

Price and yield of bond share an inverse relation. So, if the yield falls, price of the bond rises.

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