Question

Dewey has one share of stock and one bond. The total value of the two securities...

Dewey has one share of stock and one bond. The total value of the two securities is $1,050. The bond has a YTM of 18.60 percent, a coupon rate of 12.40 percent, and a face value of $1,000; pays semi-annual coupons with the next one expected in 6 months; and matures in 6 years. The stock pays annual dividends that are expected to grow by 1.73 percent per year forever. The next dividend is expected to be $18.10 and paid in one year. What is the expected return for the stock?  What is the expected return for the stock? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Homework Answers

Answer #1
Price of bond:
n = 12
I = 9.30%
Cashflows Amount PVF Present Value
Semi annual (1000*12.40%*6/12) 62 7.05377 437.3337
Principal 1000 0.344 344
Price of bond: 781.3337
Price paid for Stock = 1050-781.33 = 268.67
Expected dividend = 18.10
Growth rate = 1.73%
Dividend yield = Expected dividend / Stock price
18.10/ 268.67 = 6.74%
Expected return on stock = Dividend yield +Growth rate
6.74% + 1.73% = 8.47%
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