Reference no: EM132531193
Point 1: You are considering three investments. The first is a bond that is selling in the market at $1 200. The bond has a $1 000 par value, pays interest at 8% and is scheduled to mature in 10 years. For bonds of this risk class you believe that a 9% rate of return should be required.
The second investment that you are analyzing is a preferred stock ($125 par value) that sells for $120 and pays an annual dividend of $18. Your required rate of return for this stock is 16%.
The last investment is a common stock that recently paid a $2 dividend. The firm expects to pay a dividend of $2.18 at year end and this growth in dividends per share is expected for the indefinite future. The stock is selling for $20 and you think a reasonable required rate of return for the stock is 20%.
Required:
Question a. Calculate for each security
i. Expected rate of return
ii. The current value based on your required rate of return
Question b. Which of the investment(s) should you accept? Why?
Question 2. Xtra Ltd. is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 12% during the next two years, at 10% in the third year, and at a constant rate of 4 % thereafter. ABC's last dividend was $2.50 and the required rate of return on the stock is 9%. Calculate the value of the stock
Question 3. The ABC Ltd common stock currently sells for $34.00 but is expected to rise to $38.08 at the end of the year at which time it will pay a dividend of $3.23.
Determine the stock's
i. capital gain yield
ii. required rate of return
iii. dividend yield
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