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Finance: Bond and Dividend Valuation

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Ace, Inc. has just paid a $2.00 annual dividend on its common stock. The dividend is expected to grow at a constant rate of 8 percent per year indefinitely. Based on market risk conditions and Ace's beta value, the required rate of return on Ace's stock is 16 percent. What is the current value of Ace's stock?

A $1000 face value bond which will mature in 20 years has a coupon rate of 12 percent with semiannual coupon payments. If the market has priced similar bonds to yield 10 percent, what is this bond's value?

What would the value of the bond in the previous problem be if market rates changed so that the yield for such bonds is 14 percent?

A Consol (perpetual) bond pays $250 every 6 months. If the interest rate is 14 percent, what is this bond's selling price?

Company X has a $1000 face value, 12 percent coupon bond making annual coupon payments with 10 years to maturity. If the market interest rate for similar bonds is 14 percent, what is this bond's selling price?

If the Company X bond in the previous problem makes semi-annual coupon payments instead of annual payments, what would this bond's selling price?

A $1000 face value bond is invested which will mature in 2 yrs. The bond has an 8 percent coupon to be paid semi-annually. Similar bonds are yielding 6 percent in the market. What is this bond's current market price?

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Solution Summary

The problems deal with bond and stock valuation.

Solution provided by:
Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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