Question
A Walmart bond you purchased two years ago for $890 is now selling for $925. The bond paid $100 per year in coupon interest on
A Walmart bond you purchased two years ago for $890 is now selling for $925. The bond paid $100 per year in coupon interest on the last day of each year (the last payment made today). You intend to hold the bond for four more years and project that you will be able to sell it at the end of year 4 for $990. You also project that the bond will continue paying $100 in interest per year. Given the risk associated with the bond, its required rate of return (r) over the next four years is 12.50 percent.
You are considering the purchase of a stock that is currently selling at $105 per share. You expect the stock to pay $4.20 in dividends next year.
- If dividends are expected to grow at a constant rate of 2 percent per year, what is your expected rate of return on this stock?
- If dividends are expected to grow at a constant rate of 5 percent per year, what is your expected rate of return on this stock?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started