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Hania Sheikh 1003203014: Rate of Return Dividend/price

The document discusses several questions related to stock and bond valuation: 1) It calculates the price of bonds with yields of 7%, 8%, and 9% respectively, explaining that price increases as the required rate of return decreases. 2) It defines convertible bonds, subordinated debt, and call provisions as they relate to bond features and risks. 3) It values a stock at $34.38 given its expected dividend growth rate, beta, standard deviation, and required return for the company.

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Hania Sheikh
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95 views

Hania Sheikh 1003203014: Rate of Return Dividend/price

The document discusses several questions related to stock and bond valuation: 1) It calculates the price of bonds with yields of 7%, 8%, and 9% respectively, explaining that price increases as the required rate of return decreases. 2) It defines convertible bonds, subordinated debt, and call provisions as they relate to bond features and risks. 3) It values a stock at $34.38 given its expected dividend growth rate, beta, standard deviation, and required return for the company.

Uploaded by

Hania Sheikh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Hania Sheikh 1003203014

Question 3
a.)What is the expected rate of return on the stock?
rate of return = dividend/price

7.78%

b)If an investor's required rate of return is 9%, what is the value of the stock to that investor?
Value of stock = 4.20/0.09 r 0.09
46.67

C)Considering the investor's required rate of return, does this stock seem to be a desirable investment?
No, The price of stock is heigher than expected.

Question 1
aCalculate the price if the yield to maturity on the bonds
is 7, 8, and 9 percent, respectively.
for 7%
P = C [ {(1 + r)n - 1} / r(1 + r)n ] + F / (1 + r)n
F=1000, C =1000 x 8% , r=0.07 , n =11
For 7 %
80 x [{(1 + 0.07)11 - 1} / 0.07 x (1 + 0.07)11] + $ 1000 / (1 + 0.07)11
 80 x [(1.0711 - 1) / 0.07 x 1.0711 ] + $1000 / 1.0711
$1,071.06
For 8%
80 x [{(1 + 0.08)11 - 1} / 0.08 x (1 + 0.08)11] + $ 1000 / (1 + 0.08)11
 80 x [(1.0811 - 1) / 0.08 x 1.0811 ] + $1000 / 1.0811
$1,000

For 9%
80 x [{(1 + 0.09)11 - 1} / 0.08 x (1 + 0.09)11] + $ 1000 / (1 + 0.09)11
 80 x [(1.0911 - 1) / 0.09 x 1.0911 ] + $1000 / 1.0911
$935

b)Explain the impact on price if the required rate of return decreases.


The price of the bond will increase

c)Compute the coupon rate on the bonds. How does the relationship between the coupon rate and the yield to maturity de
Coupon rate = ($40 × 2)/$1,000 = 8%
A bond with a YTM above the coupon rate will sell at
a discount.The investor will pay less than the
par value for the bond, but will receive its par value
at maturity. This built-in gain drives the investor's
return up
above the coupon rate. If the coupon rate equals the
YTM, the bond will sell for its par value. If the YTM is
below the
coupon rate, the coupons are attractive thus an
investor will pay more than the par value for the
bond.

Question 4
Diana Ltd. paid a $2.50 per share dividend yesterday. The dividend is expected to grow at 10 percent per year for the forese
per year growth $2.50
required return 18%
beta 1.6
per share growth 10%
stan deviation of return 30%

Devident Year 1= $2.75

Common stock value = $34.38

Question 2
Convertible bonds :Convertible bonds contain a provision that allows the bondholder to convert the bond into shares of the c

Call provision: Bonds with call provisions pay a higher


coupon interest rate than noncallable bonds.The call
provision allows companies to refinance their debt
when interest rates fall.

Cons
The exercise of the call provision happens when rates
fall, hitting investors with reinvestment risk.In rising
rate environments, the bond may pay a below-
market interest rate.
Subordinated debt is an unsecured loan or bond
that ranks below other, more senior loans or
securities with respect to claims on assets or
earnings. Subordinated debentures are thus also
known as junior securities
and the yield to maturity determine how a bond's price will compare to it par value?
ercent per year for the foreseeable future. Diana Ltd. has a beta of 1.6, a standard deviation of returns of 30 percent, and a required retu

the bond into shares of the corporation's common stock. Generally, the stock price has to increase significantly before conversion would b
0 percent, and a required return of 18%. What is the value of a share of Diana Ltd. common stock?

ntly before conversion would benefit the bondholder. Owning a convertible bond means the bondholder owns a bond and a stock option.
ns a bond and a stock option. Because of the added feature, convertible bonds generally sell at a higher price than nonconvertible bonds o
e than nonconvertible bonds of comparable risk. Convertible bonds also may have a call provision

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