 ## Question

1.) Consider the following information .How many shares do you hold today if you bought 1,000 shares of this stock at the beginning of 1985?

1986-10 percent stock dividend
1987-10 percent stock dividend
1988-25 percent stock dividend
1989-100 percent stock dividend
1994-2 for 1 stock split
1994-2 for 1 stock split
2007-100 percent stock dividend

2.) Ten years ago a stock paid a \$0.30 dividend. Since then it has split 2 for 1 twice. The current dividend is \$ 0.16.If you have a required rate of return of 14 percent ,what is the most you can pay for this stock?

3.) Ten years ago a stock paid \$ 0.40 dividend. Since then it has a split 3 for 1.The current dividend is \$ 0.18.If you have a required rate of return of 15 percent, what is the most you can pay for the stock?

4.) A stock split sells for \$ 40.23 and currently pays a \$ 0.55 dividend. If the market expects a 13 percent rate of return of this stock, what dividend growth rate do these figures imply.?

Assume that all bonds are \$ 1,000 par value.

5.) A person buys a five year ,\$1,000 certificate of deposit that carries a nominal rate of 9 percent, compounded semiannually. Six months after this purchase a 4 ½ year CD at the same bank offers a 9.5 percent annual rate, also compounded semiannually. How much difference is there in total interest paid by the two competing investments?

6.) A seven-year bond with an 8 percent coupon rate has a yield to maturity of 9.15 percent. What is the current bond price?

7.) Calculate the duration of the bond in Problem 2 using the following methods.
b.)The closed form method

8.) A zero coupon bond matures in eight years and sells for \$500.
a.)Without doing any calculations, estimate its yield to maturity
b.)Calculate the exact yield to maturity.

## Solution Preview

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1.) Consider the following information .How many shares do you hold today if you bought 1,000 shares of this stock at the beginning of 1985?

1986-10 percent stock dividend (X 1.1)
1987-10 percent stock dividend (X 1.1)
1988-25 percent stock dividend (X 1.25)
1989-100 percent stock dividend (X 2)
1994-2 for 1 stock split (X 2)
1994-2 for 1 stock split (X 2)
2007-100 percent stock dividend (X 2)

1000 x 1.1 x 1.1 x 1.25 x 2 x 2 x 2 x 2 = 24,200

2.) Ten years ago a stock paid a \$0.30 dividend. Since then it has split 2 for 1 twice. The current dividend is \$ 0.16.If you have a required rate of return of 14 percent, what is the most you can pay for this stock?

Calculate g:

First you owned 1 share and now you have 4. Current dividends on an adjusted basis are therefore \$0.16 x 4 = \$0.64, and they “grew” 7.87%:

.30(1 + g)10 = .64  g = (.64/.30).1 – 1 = 7.87%
Pt = Div(t+1)/(r-g) = .16(1.0787)/(.14 - .0787) = \$2.82...
\$34.00 for this solution

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