Question

5. Fisher common stock is expected to pay a $2.25 dividend next year. Dividends are expected to grow at a 5 percent rate forever. The stock currently sells for $26, and your required rate of return is 14 percent, should you purchase the stock?

6. Jones bonds have four years left to maturity pays and carry an 8% coupon rate. The required rate of return is 4%. Find Macaulay's duration. Round intermediate steps to four decimals.

7. What is the duration of a two-year bond that pays an annual coupon of 12 percent and has a current yield to maturity of 14 percent? Round your answer to four decimal places.

8. What would be the percentage change in the value of the bond mentioned in the previous question if interest rates increase by 75 basis points? Round intermediate steps and your final answer to four decimals

9. What is the duration of a three-year Treasury bond with a 5.5 percent coupon selling at par?

Answer 1

Calculate the current price of the stock as follows:

Current price = Expected dividend/(Required return - growth)

= $2.25/(14%-5%)

= $2.25/9%

= $25

Therefore, the current price of the stock is $25.

Stock is overpriced, because current price of the stock is $25 but it is trading at $26.

So, you should not buy the stock.