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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
50.00%
25.00%
8.00%
Dividend
$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)
