Given the opportunity to invest inoneof the three bonds listed below, which would you purchase? Assume an interest rate of 7%.HINT: Calculate NPV of each of the bonds.

Bond

Face Value

Annual Coupon Rate

Maturity

Price

A

$1,000

4%

1 year

$990

B

$1,000

7.5%

17 years

$990

C

$1,000

8.5%

25 years

$990

Question 2 (3 Marks)

Gruber Corp. pays a constant $9 dividend on its stock. The company will maintain this dividend for the next 12 years and will then cease paying dividends forever. If the required return on this stock is 10 percent, what is the current share price?

Question 3 (10 marks)

Storico Co. just paid a dividend of $3.85 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth by 5 percentage points per year until it reaches the industry average of 5 percent dividend growth, after which the company will keep a constant growth rate forever. If the required rate of return on Storico stock is 13 percent, what will a share of stock sell for today?

Answer rating: 100% (QA)

1 To calculate the Net Present Value NPV of each bond we need to discount the future cash flows coupon payments and face value to present value using ... View the full answer