Question

1. Troy is interested in buying a particular stock whose current dividend is $1.35, and whose dividend is expected to increase at a rate of 5% per year for two years, and then at 2.5% per year thereafter forever. Which of the following comes closest to an estimate of the price per share of the stock if the required rate of return is 13.40%.

2. You are trying to price two bonds that have the same maturity and par value but different coupon rates. Both bonds mature in 8 years and at maturity both bonds return the par value of $1,000. Bond A has a coupon rate of 3% and a yield to maturity of 3%. Bond B has a coupon rate of 5% and a yield to maturity of 6%. Which of the following is true of the prices of these bonds?

3. Which of the following comes closest to the value of a perpetuity that pays to the holder the amount of $100 beginning at the end of year 5 and then continues forever (in year 6, year 7, and so on without ever stopping). Use a required rate of return of 2%?

Answer 1

1)