1) Last year Clark company issued a 10-year ,12 % semiannual coupon bond at its par value of $1000. The bond can be called in 4 yrs at a price of $1,060, and it now sells for $1100.
a. What are the bond's yield to maturity and its yield to call? Would an investor be more likely to actually earn the YTM or the YTC?
b What is the current yield? Is this yield affected by whether or not the bond is likely to be called?
c. What is the expected capital gains (or loss) yield for the coming year? Is this yield dependent on whether or not the bond is expected to be called?
2) NON CONSTANT GROWTH: Microtech corporation is expanding rapidly and currently needs to retain all of its earnings, hence it does not pay dividends.However, investors expect Microtech to begin paying dividends, beginning with a dividend of $1.00 coming 3 yrs from today. The dividend should grow rapidly-at a rate of 50 percent per year-during Years 4 and 5, but after Year 5 growth should be a constant 8 % per year. If the required return on Microtech is 15 %,what is the value of the stock today?
The solution answers 2 questions:
1) Bond Yields-yield to maturity, yield to call, current yield
2) value of stock for non constant growth