Suppose the following spot rates are available: 5.0% for one year, 6.0% for two years, 6.5%...

  

Transcribed Image Text:

Suppose the following spot rates are available: 5.0% for one year, 6.0% for two years, 6.5% for three years, and 7.0% for four years. Suppose you want to borrow $20 million for two year, starting one years from today, what would be a fair rate for the forward contract? Dividend discount model. The common stock of XYZ is selling for $17.00. The firm pays dividends that are expected to grow at a rate of 3.60% indefinitely. (a) If the current dividend is $1/share, what is the implied required rate of return of XYZ's equity? (b) If the expected next year dividend is $1/share, what is the implied required rate of return of XYZ's equity? (c) What do you estimate the price of XYZ stock to be after 10 years (at t = 10)? Suppose the following spot rates are available: 5.0% for one year, 6.0% for two years, 6.5% for three years, and 7.0% for four years. Suppose you want to borrow $20 million for two year, starting one years from today, what would be a fair rate for the forward contract? Dividend discount model. The common stock of XYZ is selling for $17.00. The firm pays dividends that are expected to grow at a rate of 3.60% indefinitely. (a) If the current dividend is $1/share, what is the implied required rate of return of XYZ's equity? (b) If the expected next year dividend is $1/share, what is the implied required rate of return of XYZ's equity? (c) What do you estimate the price of XYZ stock to be after 10 years (at t = 10)?

Answer rating: 100% (QA)

To calculate the fair rate for the forward contract we can use the formula for the forward rate The ... View the full answer