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?






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?






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?








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


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)



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)


Price of share = $27.51

DPS1= $2.40

g= 4.5%

putting the values ,


Ke-0.045= 2.40/27.51


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

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



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

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