Question

.

NEED ANSWER ASAP / ANSWER NEVER USED BEFORE

a.)

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 7.6% annual coupon bonds at their par value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

Select the correct answer.

a. $1,194.42

b. $1,204.86

c. $1,208.34

d. $1,201.38

e. $1,197.90 b.) Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 9%, based on semiannual compounding. What is the bond's price? Select the correct answer. a. $806.58 b. $813.86 c. $821.14 d. $810.22 e. $817.50 c.) A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 7.5%. What is the stock's current price? Select the correct answer. a. $27.72 b. $25.00 c. $30.44 d. $29.08 e. $26.36 d.) A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 8.5%, and the constant growth rate is g = 4.0%. What is the current stock price? Select the correct answer. a. $36.11 b. $35.15 c. $35.63 d. $34.67 e. $34.19

Answer 1

a. The current price of the bond is computed as shown below:

Annual coupon payment is computed as follows:

= 7.6% x $ 1,000

= $ 76

= $ 76 / 1.055¹ + $ 76 / 1.055² + $ 76 / 1.055³ + $ 76 / 1.055⁴ + $ 76 / 1.055⁵ + $ 76 / 1.055⁶ + $ 76 / 1.055⁷ + $ 76 / 1.055⁸ + $ 76 / 1.055⁹ + $ 76 / 1.055¹⁰ + $ 76 / 1.055¹¹ + $ 76 / 1.055¹² + $ 76 / 1.055¹³ + $ 76 / 1.055¹⁴ + $ 1,000 / 1.055¹⁴

= $ 1,201.38 Approximately

So the correct answer is option d i.e. $ 1,201.38

b. The bond's price is computed as shown below:

Coupon payment is computed as follows:

= 6.25% / 2 x $ 1,000 (Divided by 2 since semi annual compounding )

= $ 31.25

N is computed as follows:

= 10 x 2 (Multiplied by 2 since semi annual compounding )

= 20

YTM is computed as follows:

= 9% / 2 (Divided by 2 since semi annual compounding )

= 4.5% or 0.045

So the price of the bond will be as follows:

= $ 31.25 / 1.045¹ + $ 31.25 / 1.045² + $ 31.25 / 1.045³ + $ 31.25 / 1.045⁴ + $ 31.25 / 1.045⁵ + $ 31.25 / 1.045⁶ + $ 31.25 / 1.045⁷ + $ 31.25 / 1.045⁸ + $ 31.25 / 1.045⁹ + $ 31.25 / 1.045¹⁰ + $ 31.25 / 1.045¹¹ + $ 31.25 / 1.045¹² + $ 31.25 / 1.045¹³ + $ 31.25 / 1.045¹⁴ + $ 31.25 / 1.045¹⁵ + $ 31.25 / 1.045¹⁶ + $ 31.25 / 1.045¹⁷ + $ 31.25 / 1.045¹⁸ + $ 31.25 / 1.045¹⁹ + $ 31.25 / 1.045²⁰ + $ 1,000 / 1.045²⁰

= $ 821.14 Approximately

So the correct answer is option c i.e. $ 821.14

c. The stock's current price is computed as follows:

= Expected dividend at the end of the year / ( required rate of return - growth rate )

= $ 0.75 / ( 0.105 - 0.075 )

= $ 25.00

So the correct answer is option b i.e. $ 25.00

d. The current stock price is computed as follows:

= Dividend just paid ( 1 + growth rate ) / (required rate of return - growth rate )

= $ 1.50 ( 1 + 0.04 ) / ( 0.085 - 0.04 )

= $ 34.67 Approximately

So the correct answer is option d i.e. $ 34.67

Feel free to ask in case of any query relating to this question