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    Dividend yield, YTM, YTC

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    1. The expected rate of return on the common stock of Northwest Corporation is 14 percent. The stock's dividend is expected to grow at a constant rate of 8 percent a year. The stock currently sells for $50 a share. Which of the following statements is most correct?

    a. The stock's dividend yield is 8 percent.
    b. The stock's dividend yield is 7 percent.
    c. The current dividend per share is $4.00.
    d. The stock price is expected to be $54 a share in one year.
    e. The stock price is expected to be $57 a share in one year.

    2. Gold Mines, Ltd. has 100 bonds outstanding (maturity value = $1,000). The required rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. What is the annual coupon interest rate?

    a. 8%
    b. 6%
    c. 4%
    d. 2%
    e. 0%

    3. A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. What is the bond's YTM and YTC?

    YTM YTC
    a. 6.05%; 9.00%
    b. 10.00%; 10.26%
    c. 10.06%; 12.00%
    d. 11.26%; 14.00%
    e. 11.26%; 10.00%

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    Solution Preview

    ** See ATTACHED file for complete details **

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    1.  The expected rate of return on the common stock of Northwest Corporation is 14 percent.  The stock's dividend is expected to grow at a constant rate of 8 percent a year.  The stock currently sells for $50 a share. Which of the following statements is most correct?

    a. The stock's dividend yield is 8 percent.
    b. The stock's dividend yield is 7 percent.
    c. The current dividend per share is $4.00.
    d. The stock price is expected to be $54 a share in one year.
    e. The stock price is expected to be $57 a share in one year.

    Answer: d. The stock price is expected to be $54 a share in one year.

    The share price is expected to grow at the rate of growth of dividends= 8%
    Therefore, share price next year = 50 x (1+8%)= $54.00

    Thus e) is incorrect

    Total return= 14%
    growth= 8%
    Therefore, dividend yield= 14%-8%= 6.00%

    Thus a) and b) are incorrect

    Calculate the dividend 1 year from now, using the ...

    Solution Summary

    Three finance problems on calculating dividend yield, annual coupon interest rate, and a bond's YTM and YTC have been answered.

    $2.19