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homework%207ak

# homework%207ak - 1 What is the present discounted value of...

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1. What is the present discounted value of a coupon bond that pays \$100 in one year and then a face value of \$500 in two years time if the interest rate is 0.10? PDV = 100/1.1 + 500/(1.1)^2 = 90.91 + 413.22= 504.13 2. Suppose that we live in a world of complete certainty. The interest rate is known to be 5% and will be that forever. A particular company, Mantar Inc, promises to pay a dividend equal to \$8 every year, forever. It is known that Mantar will pay this dividend and it will never change. a. What will shares for Mantar Inc sell for? Share price = 8/.05 = \$160 b. What if the interest rate were 7% instead of 5%? What would be the share price. Share price = 8/.07 = \$114.29 c. Suppose that instead of paying \$8 forever, Mantar Inc. will pay \$8 the °rst year, \$10 the second year, and \$15 from then on. a. What will be the price of a share of Mantar Inc? Share price = 8/1.05 + 10/(1.05)^2 + (1/(1.05)^2)*(15/.05)= 7.62+ 9.07+272.11 = \$288.80 What will be the share price in exactly one year (after the \$8 dividend is paid)? Share price in one year = 10/(1.05) + (1/1.05)*(15/.05)=9.52+285.71=295.23 b. What will be the share price in exactly two years?

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