Valuing bond and common stocks
Not what you're looking for?
1.Baron Inc. bonds have a face value of $1000 and mature in 10 years. The coupon rate is 18%, and coupons are paid semiannually. The yield is 12% compound semiannually. Find the bond's price.
2. Danish Inc. has cumulative preferred stock that pays an annual dividend of $4.50. If the current price is $37.50, what is the required return?
3. Alpo expects to pay dividends of $3.54 at the end of year 1, $4.18 at the end of year 2, and $4.93 at the end of year 3. After year 3, dividends are expected to grow at a constant rate of 8% each year. The required return is 18%. What is Alpo's current share price?
4. XXC expects earnings per share to be $6.00 next period. The retention rate is 60% and the return on equity (ROE) is 20%. The required return is 18%. What is XXC's stock price?
Note- Interest is compounded annually and payments are at year end unless stated otherwise.
Purchase this Solution
Solution Summary
There are four problems. Solution to second problem depicts the steps to calculate required rate of return on a preferred stock. Solutions to other problems demonstrate the methodology to estimate the values of a coupon paying bond and common stocks.
Solution Preview
1.Baron Inc. bonds have a face value of $1000 and mature in 10 years. The coupon rate is 18%, and coupons are paid semiannually. The yield is 12% compound semiannually. Find the bond's price.
Face Value=M=$1000
Coupon rate=18% p.a.
Semi annual coupon rate=18%/2=9%
Semiannual Coupon amount, C=9% of face value=$1000*9%=$90
Number of coupon payments left, n=10*2=20
Annual Yield=12%
Semi annual Yield, r=12%/2=6%
Here, we are getting coupon payments on regular periods. It is a case of ordinary annuity with amount C=$90, discount rate=semi annual yield=6% and number of period=20.
PV of ordinary annuity is given by= C/r*(1-1/(1+r)^n)
PV of maturity ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
- "Thank you"
- "Really great step by step solution"
- "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
- "Thanks Again! This is totally a great service!"
- "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
Motivation
This tests some key elements of major motivation theories.
Change and Resistance within Organizations
This quiz intended to help students understand change and resistance in organizations
IPOs
This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)
Transformational Leadership
This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.