FINA4332 – Fall 2011
Solutions to Homework 2
Student name:____________________________
Points
Instructions
The homework is due on Saturday, November 12, 2011 (any time during Saturday,you can leave
your homework under my door if I am not there). On Sunday, November 13, I will post the
solutions. Your solutions should appear on this document.
I will not accept
loose leaf homework
assignments and assignments after 11:59pm on Saturday, November 12, 2011
1.
Ten years ago a stock paid a $0.30 dividend. Since then it has split 2 new-for-1 old,
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?(Hint: first calculate the dividend growth rate
from these two dividends, be careful with the most recent dividend, think what would it
have been if the two splits had not occurred)
Solution
If the split had not occurred the new dividend would have been 0.16*2=$0.32
(
)
(
)
0
10
1
1/10
10
10
10
10
0
0
0.30;
0.32;
0.32
1
1
1
0.006475
0.30
0.6475%
D
D
D
D
D
g
g
D
g
⎛
⎞
⎜
⎟
⎝
⎠
=
=
⎛
⎞
⎛
⎞
=
+
⇒
=
−
=
−
=
⎜
⎟
⎜
⎟
⎝
⎠
⎝
⎠
=
In your calculators
PV=0.30; FV=0.32; PMT=0; N=10; CPT I/Y=0.6475 (The I/Y is your growth rate in this
case)
2.
An 8-percent-coupon bond sells for $800 and matures in seven years. Calculate its yield
to maturity, assuming the following:
a.
The bond pays a single annual interest payment.
b.
The bond pays interest semiannually.
Solution
a.
PV=-800, FV=1000, N=7, PMT=0.08*1000=80, CPT I/Y=12.44% and
YTM=12.44%
b.
PV=-800, FV=1000, N=7*2=14, PMT=(0.08*1000)/2=40, CPT I/Y= 6.175% and
YTM=2*6.175%=12.35

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