Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
4
4. Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer in Launceston has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 6 per cent, with interest being paid semiannually. The required simple rate on this debt has now risen to 15 per cent. What is the current value of this bond?
5. A share of common stock has a current price of $80.50 and is expected to grow at a constant rate of 5 per cent. If you require an 8 per cent rate of return, what is the current dividend on this stock?
Expert Solution
Question-4
Current Value of the Bond
· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
· Here, the calculation of the Bond Price using financial calculator is as follows
|
|
|
|
|
Variables |
Financial Calculator Keys |
Figure |
|
|
|
|
|
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
|
Coupon Amount [$1,000 x 6.00% x ½] |
PMT |
30 |
|
Market Interest Rate or Yield to maturity on the Bond [15.00% x ½] |
1/Y |
7.50 |
|
Maturity Period/Time to Maturity [15 Years x 2] |
N |
30 |
|
Bond Price/Current market price of the Bond |
PV |
? |
|
|
|
|
Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $468.53.
Hence, the Current Value of the Bond will be $468.53
Question-5
Current price of the share = Current year dividend / (Required rate of return – Growth rate)
P0 = D1 / (Ke – g)
$80.50 = D1 / (0.08 – 0.05)
$80.50 = D1 / 0.03
D1 = $80.50 x 0.03
D1 = $2.415 per share or
D1 = $2.42 per share (Rounded to 2 decimal)
Therefore, the Current year dividend will be $2.42
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
