question archive Consider Table 1, which presents data for three stocks, stock 1, stock 2, and stock 3
Consider Table 1, which presents data for three stocks, stock 1, stock 2, and stock 3
Subject:FinancePrice:2.86 Bought7
Consider Table 1, which presents data for three stocks, stock 1, stock 2, and stock 3. (€) Table 1 Stock price Next period Market ROE (%) Payout ratio Growth rate dividend per capitalization (%) (%) share (6) rate (%) Stock 1 1.50 20% 25% 100% 0% Stock 2 1.00 15% 10% 75% Stock 3 12.00 0.80 5% 100% 0% a) Consider Table 1. Calculate the price of stock 1 and the price of stock 2. Detail all calculations that you use. b) Consider Table 1. Calculate the market capitalization rate for stock 3. Detail all calculations that you use. c) Consider Table 1. Calculate the growth rate of stock 2. Detail all calculations that you use. d) A 3-year bond with 10% coupon rate and $1000 face value yields 8% APR. Assuming annual coupon payment, calculate the price of the bond. Detail all calculations that you use.
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Please find the solution as below
a) Price of stock 1 = next period dividend per share/market capitalisation rate
= 1.5/0.2 = €7.5 per share
Price of stock 2 = next period dividend/(market capitalisation rate-growth)= 1/(0.15 -0.025)= €8 per share
Note - For calculation of growth rate of stock 2, see part (c)
b) Price of stock 3 = next period dividend/market capitalisation rate
12= 0.8/market capitalisation rate
Hence, market capitalisation rate = 0.8/12 = 0.0666 = 6.67%
c) Growth rate (g) = ROE*retention ratio
= 10*0.25 = 2.5%
Retention ratio = 1- payout ratio = 1-0.75 = 0.25
d) Value of the bond = present value of coupon payments + present value of redemption amount
= 1000*10%*PVAF (8%,3) + 1000*PVIF(8%,3)
= 100*2.578 + 1000*.794
= 1051.71
