Answer all questions.,

ECON 310: Problem Set #3 Please submit through Canvas Due Date: October 23, 2020 For all of the questions in this problem set, amume there is no tax at all. Stocks Consider stock A with a dividend yield equal to 2.5% (based on its dividend payments over the past year) The dividends are expected to grow at 8% per year. Stock A is currently traded at $52 per share. 1, According to Gordon's model, what would be the expected return on the stock? Answer: The Gordon's model states that P = DI TE - 9 Rearrange the terms we get Pi(1+g) +9= 2.5% . (1+8%) +8%=10.7%% 2. Suppose the total dividends paid over the next year is $1.4 per share, leading to a downward revision of the expected dividend growth rate to 7.5%%, Assume the expected rate of return remains the same for this stock, what would be the actual rate of return from holding this stock over the next year? Answer: The price of stock A a year from now, according to Gordon's model, is 1+9 -14- 1 +7.5% 10.7% -7.5% =$47.03/share The rate of return is Rut - Dent Ann -A_1.4+47.03-52 52 =-687% 3. Consider stock B which just paid $6 in dividends over the past year. The expected return on the stock is 12.5% and the stock is currently traded at $120 per share. At what rate are the dividends expected to grow for this stock according to Gordon's model? Answer: Again, starting with the Gordon's model 1+9 P = DITE - 9 and rearrange the terms we have Pi(TE - g) = D,(1+ 9)Question 2 (20 Marks). a) A bond with a coupon rate of 7% makes semi-annual coupon payments on January 15 and July 15 of each year. The Wall Street Journal reports the ask price for the bond on February 15 at 101% of the par value. The par value of the bond is 1000. What is the invoice price of the bond? The coupon period has 182 days