# A)Broke Benjamin Co. has a bon

A)Broke Benjamin Co. has a bond outstanding that makessemiannual payments with a coupon rate of 5.8 percent. The bondsells for \$974.17 and matures in 14 years. The par value is \$1,000.What is the YTM of the bond?

3.04%

5.77%

6.08%

5.47%

4.56%

b)The common stock of Eddie’s Engines, Inc., sells for \$27.51 ashare. The stock is expected to pay a dividend of \$2.40 per sharenext year. Eddie’s has established a pattern of increasing theirdividends by 4.5 percent annually and expects to continue doing so.What is the market rate of return on this stock?

5.55%

18.76%

11.46%

13.22%

8.72%

c)Kindzi Co. has preferred stock outstanding that is expected topay an annual dividend of \$4.60 every year in perpetuity. If therequired return is 4.49 percent, what is the current stockprice?

\$95.62

\$98.05

\$107.05

\$92.20

\$102.45

Solution:-

a) Ans:- 6.08%

b) Ans:- 13.22%

C)Ans:- \$102.45

Calculations are shown below :-

a) Calculation of YTM bond

Current price of bond = \$974.17

Par value= \$1000

Coupon rate= 5.8%

Semiannual interest= \$1000*5.8%*1/2 = \$29

Number of periods (n) = 14*2 = 28 periods

Calculation of YTM if it is selling at \$974.17

We will use hit and trail method to calculate the YTM .

First we take discount rate 3% as discount rate ,

Price of bond = 29*PVIFA(3%,28)+1000*PVIF(3%,28)

= 29*18.76410823+1000*0.437076753

=\$981.24

Now we will assume discount rate to be 4%.

Price of bond = 29*PVIFA(4%,28)+1000*PVIF(4%,28)

= 29*16.66306322+1000*0.333477471

= \$816.71

Now YTM of bond can be calculated as follows

Hal yearly YTM=Lower DR+Difference b/w DRs{[PV of lowerDR-PV]/Absolute difference B/w DRs}

Where, DR stands for discount rate

PV stands for present value

B/W stands for between.

Now substituting the value

Half yearly YTM = 3%+1%*981.24-974.17)/(981.24-816.71)

=3%+0.04%

=3.04%

Hence the YTM = 2*3.04%= 6.08%

b) Calculation of market return on equity .

Using DDM we have

Price of share =DPS1/(Ke-g)

Where

Price of share = \$27.51

DPS1= \$2.40

g= 4.5%

putting the values ,

27.51=2.40/(Ke-0.045)

Ke-0.045= 2.40/27.51

Ke=13.22%

Hence the market rate of return on stock is =13.22%

c) Current price of preferred stock = Preferreddividend/ required return

=\$4.60/0.0449

=\$102.45

Please feel free to ask if you have any query in thecomment section.

##### "Our Prices Start at \$11.99. As Our First Client, Use Coupon Code GET15 to claim 15% Discount This Month!!"

Pages (275 words)
Standard price: \$0.00
Client Reviews
4.9
Sitejabber
4.6
Trustpilot
4.8
Our Guarantees
100% Confidentiality
Information about customers is confidential and never disclosed to third parties.
Original Writing
We complete all papers from scratch. You can get a plagiarism report.
Timely Delivery
No missed deadlines – 97% of assignments are completed in time.
Money Back