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FINA4332_HW2 - FINA4332 Fall 2011 Solutions to Homework 2...

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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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