Question

237 #37 The risk-free rate is 1.49% and the market risk premium is 8.00%. A stock with a ß of 1.68 just paid a dividend of $3.00 The dividend is expected to grow at 20.86% for three years and then grow at 3.05% forever. What is the value of the stock? Submit Answer format: Currency: Round to: 2 decimal places. #38 Assume a par value of $1,000. Caspian Sea plans to issue a 18.00 year, annual pay bond that has a coupon rate of 7.92%. If the yield to maturity for the bond is 8.47%, what will the price of the bond be? Submit Answer format: Currency: Round to: 2 decimal places.

Answer 1

Answer to Question 37:

Required Return, rs = Risk-free Rate + Beta * Market Risk Premium
Required Return, rs = 1.49% + 1.68 * 8.00%
Required Return, rs = 14.93%

Last Dividend, D0 = $3.00

Growth rate for next 3 years is 20.86% and a constant growth rate (g) of 3.05% thereafter

D1 = $3.0000 * 1.2086 = $3.6258
D2 = $3.6258 * 1.2086 = $4.3821
D3 = $4.3821 * 1.2086 = $5.2962
D4 = $5.2962 * 1.0305 = $5.4577

P3 = D4 / (rs - g)
P3 = $5.4577 / (0.1493 - 0.0305)
P3 = $5.4577 / 0.1188
P3 = $45.9402

P0 = $3.6258/1.1493 + $4.3821/1.1493^2 + $5.2962/1.1493^3 + $45.9402/1.1493^3
P0 = $40.22

Value of the stock is $40.22

Answer to Question 38:

Par Value = $1,000

Annual Coupon Rate = 7.92%
Annual Coupon = 7.92% * $1,000
Annual Coupon = $79.20

Time to Maturity = 18 years
Annual YTM = 8.47%

Price of Bond = $79.20 * PVIFA(8.47%, 18) + $1,000 * PVIF(8.47%, 18)
Price of Bond = $79.20 * (1 - (1/1.0847)^18) / 0.0847 + $1,000 * (1/1.0847)^18
Price of Bond = $79.20 * 9.073983 + $1,000 * 0.231434
Price of Bond = $950.09