Question 2

You have a portfolio that consists of 1000 stocks of ABC and a single corporate bond.

ABC has just paid a dividend of $1.30. It is believed that this will grow by 10% a year for 5 years and then grow at 2% in perpetuity. The required rate of return for the stock is 5%. The corporate bond is a 20-year 6% annual coupon bond with a yield to maturity of 7% and a face value of $50000. Use this information to answer the following questions.

1. What is the value of one stock of ABC today? (5 Marks)
2. What is the value of the corporate bond today? (5 Marks)
3. What are the weightings of your portfolio? (5 Marks)
4. What will the weightings be after 10 years? (5 Marks)