Question

7. DPS CALCULATION: Warr Corporation just paid a dividend of $1.50 a share (that is, Do-$1.50). The dividend is expected to grow 7% a year for the next 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 5 years? (Chapter 9) 3 8. CONSTANT GROWTH VALUATION: Thomas Brothers is expected to pay a S0.50 per share dividend at the end of the year (that is, Di S0.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%. What is the stock's current value per share? (Chapter 9) 3 Application 1. An analyst evaluating securities has obtained the following information. The real rate of interest is 3% and is expected to remain constant for the next 3 years. Inflation is expected to be 3% next year, 3.5% the following year and 4% the third year. The maturity risk premium is estimated to be 0.2*(t-1)% where t number of year to maturity. The liquidity premium on relevant 3-year securities is 0.50% and the default risk premium on relevant 3-year securities is 0.8%. What is the yield on a 1-year T-bill? What is the yield on a 3-year T-bond? What is the yield on a 3-year corporate bond? (Chapter 6)

Answer 1

7.
D1:
=1.5*1.07=1.605

D2:
=1.5*1.07^2=1.71735

D3:
=1.5*1.07^3=1.8375645

D4:
=1.5*1.07^3*1.05=1.929442725

D5:
=1.5*1.07^3*1.05^2=2.02591486125

8.
=0.50/(15%-7%)=6.25

1.
a)
=3%+3%=6%

b)
=3%+(3%+3.5%+4%)/3+0.2*(3-1)%=6.90%

c)
=6.90%+0.50%+0.8%=8.20%