Question

MCQ 10-16 If a bond's value rises above its par value during...

If a bond's value rises above its par value during its life, interest rates have:

Multiple Choice

• gone up
• gone down
• stayed the same
• there is no correlation with interest rates

Problem 10-29

The Fleming Corporation paid a dividend of $0.45 last year. Over the next 12 months, the dividend is expected to grow at 13 percent, which is the constant growth rate for the firm. The new dividend after 12 months will represent D₁. The required rate of return is 18 percent.

Compute the price of a common share. (Round the final answer to 2 decimal places.)

Common share price ______   $

Problem 10-34

Triple Peaks Playhouse will pay a quarterly dividend of $0.50 at the end of the next quarter. It has common share price of $40.00 and a constant growth rate of 4 percent.

Compute the required rate of return. (Round the final answer to 2 decimal places.)

Required rate of return  _______   %

Answer 1

10 - 16)

The relation between bond price and it's interest rate is inverse. i.e., when price increases interest decreases and vice-versa

so answer is Gone down

10 - 29)

share price = D1 / Ke - growth

where Ke = required return

D1 = 0.45*(1+13%) = 0.5085

Share price = 0.5085 / (18% - 13%)

= $10.17

10 - 34)

Quarterly dividend = 0.50

annual dividend = 0.50*4 = 2

Ke =( D1 / P0 ) + g

Ke = (2 / 40) + 4%

Ke = 9%

(NOTE : here it is assumed that dividend paid for remaining three quarters,and the given growth rate is annual.otherwise answer would be different)