1) Heath Food’s bonds have 8 years remaining to maturity. The bonds the face val
ID: 2713959 • Letter: 1
Question
1) Heath Food’s bonds have 8 years remaining to maturity. The bonds the face value $1000 and yield to maturity of 8%. The pay interest annually and have a 9% coupon rate.
a) What is their current price of the bond?
b) What is the bond's current yield?
2) Thress Industries just paid a dividend of $1.50 a share. (i.e D0 = 1.50). The dividend is expected to grow 2% the year for the next three years and then 10% a year thereafter. What is the expected dividend per share for each of the next 5 years?
D1 = ?
D2 = ?
D3 = ?
D4 = ?
D5 = ?
3) Assume that the average firm in your company’s industry is expected to grow at a constant rate of 6% and the forward dividend yield (the dividend a year from now divided by today's price) is 7%. Your company is about as risky as the average firm in the industry, but has just successfully completed some R&D work that leads you to expect that its earnings and dividends will grow at a rate of 50% [D1 = D0 (1+g) = D0 x (1.50)) this year and 25% the following year, after which growth should return to the 6% industry average. If the last dividend paid (D0) was $1.00, what is the value per share of your firm’s stock?
a) What is the discount rate for stocks in this industry?
b) What are the projected dividends for years 1, 2 and 3?
c) What is the estimated value of the stock in year 2?
d) What is the estimated value of the stock today?
Explanation / Answer
1 (a) What is their current price of the bond? (Annual Interest x sum of present value factor @8% for 8 years) + (Redumption value x present value factor of 8th year) Annual Interest 90 sum of present value factor @8% for 8 years 5.746 517.14 Redumption value 1000 present value factor of 8th year 0.54 540 current price of the bond 1057.14 b) What is the bond's current yield? Year one inflow / amount invested X 100 Year Inflow 90 Amount Invested 1000 $ bond's current yield 9% 2 D1 1.5x1.02 = 1.53 $ D2 1.53X1.02 = 1.56 $ D3 1.56x1.02 = 1.59 $ D4 1.59x1.10 = 1.75 $ D5 1.75x1.10 = 1.93 $ 3 (a) What is the discount rate for stocks in this industry? 7% (b) What are the projected dividends for years 1, 2 and 3? D1 1x1.50 = 1.5 $ D2 1.50x1.25 = 1.88 $ D3 1.88x1.06 = 1.99 $ c) What is the estimated value of the stock in year 2? price (P2) =D3/KE-g 1.99/.07-.06 =199 d) What is the estimated value of the stock today? Year Inflow PVF PV D1 1.5 0.935 1.403 D2 1.88 0.873 1.641 P2 199 0.873 173.727 176.771