Ziggs Corporation will pay a $4.20 per share dividend next year.

Ziggs Corporation will pay a $4.20 per share dividend next year. The company pledges to increase its dividend by 6.50 percent per year, indefinitely.

 

Required:

If you require a 10 percent return on your investment, how much will you pay for the company’s stock today? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).)

Current stock price

$

Explanation:

Using the constant growth model, we find the price of the stock today is:

P0 = D1 / (R – g)

P0 = $4.20 / (0.10 – 0.0650)

P0 = $120.00

The next dividend payment by Mosby, Inc., will be $2.85 per share. The dividends are anticipated to

The next dividend payment by Mosby, Inc., will be $2.85 per share. The dividends are anticipated to maintain a 7.50 percent growth rate, forever. Assume the stock currently sells for $49.30 per share.

 

Requirement 1:

What is the dividend yield? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

 

Dividend yield

%

 

Requirement 2:

What is the expected capital gains yield? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

 

Capital gains yield

%

Explanation: 1:

The dividend yield is the dividend next year divided by the current price, so the dividend yield is:

 

Dividend yield = D1 / P0

Dividend yield = $2.85 / $49.30

Dividend yield = 0.0578 or 5.78%

2:

The capital gains yield, or percentage increase in the stock price, is the same as the dividend growth rate, so:

  Capital gains yield = 7.50%

The next dividend payment by Mosby, Inc., will be $3.30 per share. The dividends are anticipated to

The next dividend payment by Mosby, Inc., will be $3.30 per share. The dividends are anticipated to maintain a 2.75 percent growth rate, forever.

 

Required:

If the stock currently sells for $50.20 per share, what is the required return? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

 

Required return

%

Explanation:

We need to find the required return of the stock. Using the constant growth model, we can solve the equation for R. Doing so, we find:

 

R = (D1 / P0) + g

R = ($3.30 / $50.20) + 0.0275

R = 0.0932 or 9.32%

Patience, Inc., just paid a dividend of $2.80 per share on its stock. The dividends are expected to

Patience, Inc., just paid a dividend of $2.80 per share on its stock. The dividends are expected to grow at a constant rate of 6.75 percent per year, indefinitely. Assume investors require an 12 percent return on this stock.

 

Requirement 1:

What is the current price? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).)

 

Current price

$

 

Requirement 2:

What will the price be in four years and in sixteen years? (Do not include the dollar signs ($). Round your answers to 2 decimal places (e.g., 32.16).)

 

Four years	$
Sixteen years	$

Explanation: 1:

The constant dividend growth model is:

Pt = Dt × (1 + g) / (R – g)

So, the price of the stock today is:

P0 = D0 (1 + g) / (R – g)

P0 = $2.80 (1.0675) / (0.12 – 0.0675)

P0 = $56.93

2:

The dividend at year 5 is the dividend today times the FVIF for the growth rate in dividends and five years, so:

P4 = D4 (1 + g) / (R – g)

P4 = D0 (1 + g)5 / (R – g)

P4 = $2.80 (1.0675)5 / (0.12 – 0.0675)

P4 = $73.93

We can do the same thing to find the dividend in Year 17, which gives us the price in Year 16, so:

P16 = D16 (1 + g) / (R – g)

P16 = D0 (1 + g)17 / (R – g)

P16 = $2.80 (1.0675)17 / (0.12 – 0.0675)

P16 = $161.90

There is another feature of the constant dividend growth model: The stock price grows at the dividend growth rate. So, if we know the stock price today, we can find the future value for any time in the future we want to calculate the stock price. In this problem, we want to know the stock price in four years, and we have already calculated the stock price today. The stock price in four years will be:

P4 = P0(1 + g)4

P4 = $56.93(1 + 0.0675)4

P4 = $73.93

And the stock price in 16 years will be:

P16 = P0(1 + g)16

P16 = $56.93(1 + 0.0675)16

P16 = $161.90

An investment offers a 11 percent total return over the coming year. Bill Bernanke thinks the total real return on this investment will be only 8.4 percent.

An investment offers a 11 percent total return over the coming year. Bill Bernanke thinks the total real return on this investment will be only 8.4 percent.

Required:

What does Bill believe the inflation rate will be over the next year? (Do not include the percent sign (%). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Inflation rate

%

Explanation:

The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation, is:

(1 + R) = (1 + r)(1 + h)

h = [(1 + 0.11) / (1 + 0.084)] – 1

h = 0.0240 or 2.40%

Suppose the real rate is 3.40 percent and the inflation rate is 2.2 percent.

Suppose the real rate is 3.40 percent and the inflation rate is 2.2 percent.

Required:

What rate would you expect to see on a Treasury bill? (Do not include the percent sign (%). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Rate

%

Explanation:

The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation, is:

(1 + R) = (1 + r)(1 + h)

R = (1 + 0.0340)(1 + 0.022) – 1

R = 0.0567 or 5.67%

App Store Co. issued 15-year bonds one year ago at a coupon rate of 7.6 percent. The bonds make semiannual payments.

App Store Co. issued 15-year bonds one year ago at a coupon rate of 7.6 percent. The bonds make semiannual payments.

Required:

If the YTM on these bonds is 5.3 percent, what is the current bond price? (Do not include the dollar sign ($). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Current bond price

$

rev: 05-02-2011

Explanation:

To find the price of this bond, we need to realize that the maturity of the bond is 14 years. The bond was issued one year ago, with 15 years to maturity, so there are 14 years left on the bond. Also, the coupons are semiannual, so we need to use the semiannual interest rate and the number of semiannual periods. The price of the bond is:

P = $38.00(PVIFA2.65%,28) + $1,000(PVIF2.65%,28)

P = $1,225.32

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter

14 × 2

5.3% / 2

±$76 / 2

±$1,000

N

I/Y

PV

PMT

FV

Solve for

$1,225.32