A)Broke Benjamin Co. has a bon
A)Broke Benjamin Co. has a bond outstanding that makessemiannual payments with a coupon rate of 5.8 percent. The bondsells for $974.17 and matures in 14 years. The par value is $1,000.What is the YTM of the bond?
3.04%
5.77%
6.08%
5.47%
4.56%
b)The common stock of Eddie’s Engines, Inc., sells for $27.51 ashare. The stock is expected to pay a dividend of $2.40 per sharenext year. Eddie’s has established a pattern of increasing theirdividends by 4.5 percent annually and expects to continue doing so.What is the market rate of return on this stock?
5.55%
18.76%
11.46%
13.22%
8.72%
c)Kindzi Co. has preferred stock outstanding that is expected topay an annual dividend of $4.60 every year in perpetuity. If therequired return is 4.49 percent, what is the current stockprice?
$95.62
$98.05
$107.05
$92.20
$102.45
Answer:
Solution:-
a) Ans:- 6.08%
b) Ans:- 13.22%
C)Ans:- $102.45
Calculations are shown below :-
a) Calculation of YTM bond
Current price of bond = $974.17
Par value= $1000
Coupon rate= 5.8%
Semiannual interest= $1000*5.8%*1/2 = $29
Number of periods (n) = 14*2 = 28 periods
Calculation of YTM if it is selling at $974.17
We will use hit and trail method to calculate the YTM .
First we take discount rate 3% as discount rate ,
Price of bond = 29*PVIFA(3%,28)+1000*PVIF(3%,28)
= 29*18.76410823+1000*0.437076753
=$981.24
Now we will assume discount rate to be 4%.
Price of bond = 29*PVIFA(4%,28)+1000*PVIF(4%,28)
= 29*16.66306322+1000*0.333477471
= $816.71
Now YTM of bond can be calculated as follows
Hal yearly YTM=Lower DR+Difference b/w DRs{[PV of lowerDR-PV]/Absolute difference B/w DRs}
Where, DR stands for discount rate
PV stands for present value
B/W stands for between.
Now substituting the value
Half yearly YTM = 3%+1%*981.24-974.17)/(981.24-816.71)
=3%+0.04%
=3.04%
Hence the YTM = 2*3.04%= 6.08%
b) Calculation of market return on equity .
Using DDM we have
Price of share =DPS1/(Ke-g)
Where
Price of share = $27.51
DPS1= $2.40
g= 4.5%
putting the values ,
27.51=2.40/(Ke-0.045)
Ke-0.045= 2.40/27.51
Ke=13.22%
Hence the market rate of return on stock is =13.22%
c) Current price of preferred stock = Preferreddividend/ required return
=$4.60/0.0449
=$102.45
Please feel free to ask if you have any query in thecomment section.
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