Question

1. Maritza has one share of stock and one bond. The total value of the two securities is 1,068 dollars. The bond has a YTM of 12.58 percent, a coupon rate of 11.76 percent, and a face value of 1,000 dollars; pays semi-annual coupons with the next one expected in 6 months; and matures in 13 years. The stock pays annual dividends and the next dividend is expected to be 6.41 dollars and paid in one year. The expected return for the stock is 13.19 percent. What is the price of the stock expected to be in 1 year?

Answer 1

First we find the current bond price

Using a financial calculator

FV = 1000

PMT = 58.8 (11.76%/2 of face value 1000)

N = 26 (13years*2 semi-annual payments per year = 26periods)

I/Y = 12.58/2

cpt PV, we get PV= 948.16

Hence, bond price = $948.16

Price of the stock = 1,068-948.16 = $119.84

According to the dividend discount model, the present stock price is the present value of all the future dividends

Stock price after 1 year = Current stock price*(1+expected return) -6.41

Stock price after 1 year = 119.84*(1+0.1319)-6.41

Stock price after 1 year = $129.24