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1. Heleveton, Inc. currently pays a dividend of $1.20 per share. Dividends are expected to increase at the rate of $0.10 per share

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  • Post Date 2018-11-10T07:19:50+00:00
  • Post Category Research Paper Queries

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1. Heleveton, Inc. currently pays a dividend of $1.20 per share. Dividends are expected to increase at the rate of $0.10 per share for the next eight years. Determine the current value of Heleveton`s common stock to an investor who expects to be able to s

FINC 610

Homework Assignment 4 (9 marks)

(Individual work) 

Heleveton, Inc. currently pays a dividend of $1.20 per share. Dividends are expected to increase at the rate of $0.10 per share for the next eight years. Determine the current value of Heleveton`s common stock to an investor who expects to be able to sell the stock for

$28 after 5 years. Assume that the investor requires a 12 percent rate of return on the security.

You are an analyst studying Beranek Technologies, which was founded 10 years ago.  It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend.  Management has indicated that it plans to pay a $0.50 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter.  Your forecast of the future dividend stream, along with the forecasted growth rates, is shown below.  Assuming a required return of 11.00%, what is your estimate of Beranek`s current intrinsic value?

Year

0

1

2

3

4

5

6

7

Growth rate

NA

NA

NA

NA

50.00%

25.00%

8.00%

8.00%

Dividend

$0.00

$0.00

$0.00

$0.50

$0.75

$0.94

$1.01

$1.09


Zero current div, non-constant then constant growth                                        

Required return 11%

 In September 2014 you are considering buying a government bond. In your system you see a government bond that expires in September 2024. The annual coupon rate is 5 percent. The principal is EUR 1,000. Interest is paid each March and September. The market interest rate is 3 percent per year.

a) What is the price of the bond? If the bond is currently trading at  EUR 1,180, calculate the YTM? Would you buy and/or sell? (Explain)

b) If the market interest rate unexpectedly increases, what effect would you expect this increase to have on the price of the bond? (Please give full explanation)


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