FM212 Class work solutions
Class 3 (Chapters 4.1 and 5)
10.
a.
$100.00
0.10
$10
r
DIV
P
1
A
=
=
=
b.
$83.33
.04
0
0.10
$5
g
r
DIV
P
1
B
=

=

=
c.
×
+
+
+
+
+
+
=
6
7
6
6
5
5
4
4
3
3
2
2
1
1
C
1.10
1
0.10
DIV
1.10
DIV
1.10
DIV
1.10
DIV
1.10
DIV
1.10
DIV
1.10
DIV
P
$104.50
1.10
1
0.10
12.44
1.10
12.44
1.10
10.37
1.10
8.64
1.10
7.20
1.10
6.00
1.10
5.00
P
6
6
5
4
3
2
1
C
=
×
+
+
+
+
+
+
=
At a capitalization rate of 10 percent, Stock C is the most valuable.
For a capitalization rate of 7 percent, the calculations are similar.
The results are:
P
A
= $142.86
P
B
= $166.67
P
C
= $156.48
Therefore, Stock B is the most valuable.
11.
Purchase price for a 6year government bond with 5 percent annual coupon:
1,108.34
(1.03)
1,000
(1.03)
0.03
1
0.03
1
50
PV
6
6
=
+
×

×
=
Price one year later (yield = 3%):
1,091.59
(1.03)
1,000
(1.03)
0.03
1
0.03
1
50
PV
5
5
=
+
×

×
=
Rate of return = [$50 + ($1,091.59 – $1,108.34)]/$1,108.34 = 3.00%
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 Fall '10
 MUNGOWILSON
 Net Present Value, Dividend yield

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