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.
| 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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