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Dividend yield, YTM, YTC

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%

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