Question

a) Radoski Corporation's bonds make an annual coupon interest payment of 8.55% every year. The bonds have a par value of $1,000, a current price of $920, and mature in 12 years. What is the yield to maturity on these bonds?

	a.	6.88%
	b.	8.39%
	c.	7.30%
	d.	9.71%
	e.	10.06%

b) Goode Inc.'s stock has a required rate of return of 8.50%, and it sells for $29.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D ₀?

	a.	$1.28
	b.	$1.55
	c.	$0.41
	d.	$0.83
	e.	$0.28

Answer 1

a). Given about Radoski Corporation's bonds,

coupon rate = 8.55% every year.

Face value = $1000

coupon = 8.55% of 1000 = $85.5

Price = $920

Years to maturity = 12 years

Use following values on financial calculator to solve for YTM,

FV = 1000

PV = -920

PMT = 85.5

N = 12

Compute for I/Y, we get I/Y = 9.71

So, YTM of the bond = 9.71%

Option d is correct.

b). Given about Google Inc.,

Current stock price = $29

dividend growth rate g = 7%

The company's required return rs = 8.50%

So, value of stock today using constant dividend growth rate = D1/(rs-g)

So, 29 = D1/(0.085-0.07)

=> D1 = $0.435

So, last dividend D0 = D1/(1+g) = 0.435/1.07 = $0.41

Option c is correct.