Question
A stock pays a constant annual dividend at the end of every year. The effective annual interest rate is 2.45%. 3 marks each. a) Find
A stock pays a constant annual dividend at the end of every year. The effective annual interest rate is 2.45%. 3 marks each. a) Find the price of the stock using the dividend discount model. b) Find the Macaulay duration of the dividend cash flows. c) Suppose you invested the price of the stock in a zero coupon bond whose maturity matched the Macaulay duration from b). If the interest rate increases by 1%, find the change in value of the stock price, and find the change in value of the zero coupon bond. d) Assume the dividend increases by 3.30% each year. Now find the stock price (using the dividend discount model). e) Under the same assumption as d), find the Macaulay duration of the dividend cash flows.
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