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1) A zero growth common stock pays the annual dividend of $ 1
1)
A zero growth common stock pays the annual dividend of $ 1.75 per share at the end of each year. If the required rate of return on the common stock is 11.2 %, what is the price per share of the common stock today? (3 points)
Show your work
2)
A 6.15 percent coupon bond with 15 years left to maturity is priced to offer a yield to maturity of 7.3 percent. You believe that in one year, the yield to maturity will be 7.0 percent. What is the change in price the bond will experience in dollars? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Change in bond price=?
Expert Solution
1)
Computation of Current Share Price:
Current Share Price = Annual Dividend / Required Rate of Return
= $1.75/11.2%
Current Share Price = $15.625
So, price per share of the common stock today is $15.625
2)
Computation of Price of Bond using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of Bond = ?
Rate = 7.3%/2 = 3.65%
Nper = 15 years*2 = 30 periods
PMT = $1,000*6.15%/2 = $30.75
FV = $1,000
Substituting the values in formula:
=-pv(3.65%,30,30.75,1000)
PV or Price of Bond = $896.21
Computation of Price of Bond in One Year using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of Bond = ?
Rate = 7%/2 = 3.50%
Nper = (15-1) years = 14 years *2 = 28 periods
PMT = $1,000*6.15%/2 = $30.75
FV = $1,000
Substituting the values in formula:
=-pv(3.5%,28,30.75,1000)
PV or Price of Bond = $924.92
So, Change in Dollar Price = $924.92 - $896.21 = $28.71
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