FIN4350 (2022 SP) Exam 2 Available: MAY 06, 2022 12:00AM Due: MAY 06, 2022 11:59PM Short Notes: There are three numerical questions

FIN4350 (2022 SP)

Exam 2

Available: MAY 06, 2022 12:00AM

Due: MAY 06, 2022 11:59PM

Short Notes:

There are three numerical questions. Each question values 10 points. Please show the calculation steps.

Showing no steps will be discounted significantly.

Question 1 (10 points)

Suppose you are interested in investment of Mike Inc’s stock for one year. The stock price is $90. You also

know that the company will payout a cash dividend $1.5 per share at the end of the year. What will be the

expected stock price of Mike Inc.’s at the end of year? (Assume the risk-free rate is 4%, the expected rate of

return of the market index is 6%, the company’s beta is 1.2).

Question 2 (10 points)

Suppose you are interested in investment of J&J’s newly issued bonds. The bond’s parameters

are as follows:

1. N (maturity) = 8 years,

2. F (par value) = 1,000$,

3. rd (current yield) = 8%,

4. rc (annual coupon rate) = 8%.

Suppose after two years, the yield decreases to 7%. Please compute what will be the holdingperiod return for the two-year?

Question 3 (10 points)

Consider the following information for a public corporation:

1. The firm’s dividends are expected to grow at g = 10% until t = 2 yrs.

2. At the start of year three, growth slows to g = 5%.

3. The stock just paid a dividend d0 = $1.00

4. Assume a market capitalization rate of rs = 12%

Please compute the current price, P0, of this stock?