Question
Kingsway Electronics Inc. is expecting a period of intense growth and has decided to increase the annual dividend by 25% a year for the next
Kingsway Electronics Inc. is expecting a period of intense growth and has decided to increase the annual dividend by 25% a year for the next three years. After that they will maintain a constant growth rate of 6% per year. Last year, the company paid $2.35 as the annual dividend per share. What is the current price of this stock if the required rate of return is 10%? (10 marks)
2. Pearl Inc. offers a 6.5% coupon bond with semi annual payments. The yield to maturity is 6.71% and the maturity date is 7 years from today. What is the market price of this bond if the face value is $1,000? Show the calculations in detail. (10 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
1 Calculation of the current price of the stock To determine the current price of the stock we can use the dividend discount model DDM which calculates the present value of future dividends The formula for the DDM is P0 D1r g Where P0 is the current price of the stock D1 is the dividend expected to be paid in the next period r is the required rate of return g is the growth rate of dividends In this case the dividend is expected to increase by 25 annually for the next three years and then maintain a constant growth rate of 6 per year The required rate of return is 10 The last years dividend was 235 per share First lets calculate ...
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Intermediate Accounting
Authors: Beechy Thomas, Conrod Joan, Farrell Elizabeth, McLeod Dick I
Volume 1, 6th Edition
1259103250, 978-1259103254, 978-0071339476
