Please answer the following finance questions and SHOW ALL WORK/STEPS! 1. Nakano
ID: 2661079 • Letter: P
Question
Please answer the following finance questions and SHOW ALL WORK/STEPS!
1. Nakano Company bonds have a coupon of 4.5% paying interest semiannually. They have a face value of $1000 and will mature after 8 years. Your income tax rate for interest income is 29%, but only 16% on capital gains. You pay the taxes once a year. How much should you pay for a Nakano bond if your after-tax required rate of return is 9%?
2. Arakawa Corporation is currently paying no dividend ; however, it is expected to pay a $1.00 dividend after two years, $1.00 after three years, $1.10 after four years, and then $1.20 a year uniformly after the fifth and subsequent years. If the stockholders of Arakawa require 12% return on their investment, find the price of the stock now. What is the price after 12 years?
3. Katsushika Corporation stock pays its annual dividend every July 15th. Its expected future dividends are shown in the following table:
Year___________2014______2015______2016_______2017_______2018
Dividend_______$1.50_______$1.60_____$1.80_______$2.00______$2.25
In the year 2019 and every following year, the dividend will remain constant at $2.50. The shareholders of Katsushika will require a return of 16% on their investment. Find the price of this stock on July 16, 2014, just after it has paid its dividend. What is the price on July 10, 2016, just before it pays its dividend?
Explanation / Answer
1).
after tax interest income = 22.5*(1-.29)= $15.975
suppose intitial price = P
final price = 1000
capital gain = 1000-P
capital gain tax = .16*(1000-P)
final effective price = 1000-.16*(1000-P) = 840-.16P
now,
P = 15.975*PVIFA(4.5,16)+((840-.16P)/(1.045^16))
P = 15.975*11.2340+(840-.16P)/2.0224
P = 179.46315+(840-.16P)/2.0224
P*2.0224-179.46315*2.0224 = (840-.16P)
2.1824*P-362.95=840
P = (840+362.95)/2.1824 = $551.20
2).
Price of stock is present value of all future cash flow
Price , now= (1/1.12^2)+(1/1.12^3)+(1.1/1.12^4)+(1.2/(.12*1.12^4)) = $8.56
Price after 12 years = PV of $1.2 for infinite time period after 12 year = 1.2/.12 = $10
3).
Price on july 16, 2014 = (1.6/1.16)+(1.8/1.16^2)+(2/1.16^3)+(2.25/1.16^4)+(2.5/(.16*1.16^4)) = $13.87
Price on july 10, 2016 = 1.8+(2/1.16)+(2.25/1.16^2)+(2.5/(.16*1.16^2)) = $16.808