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Static Inc pays constant dividends of $1.50 a year and is currently priced at $ 25/share...

Static Inc pays constant dividends of $1.50 a year and is currently priced at $ 25/share (note: this means that Static falls into the zero-growth in dividends case). Dynamic Inc has issued bonds with a face value of $1000 which mature in 10 years with a coupon rate of 8 percent (payable semi-annually). If the YTM on these bonds is estimated to be equal to the required return on Static Inc’s stock, what is a fair price for a Dynamic Inc bond?

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Answer #1

First we need to find YTM on the bond which is equal to expected return on the stock

Required return = dividend/price

= 1.5/25 = 6%

Now valuation of bond

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