Problem II

Todd Mountain Development Corporation is expected to pay a dividend of $$3$ in the upcoming year. Dividends are expected to grow at the rate of $8\%$ per year. The required rate of return is $15\%.$

a$-$ Using the constant$-$growth model, calculate the intrinsic value of the stock.

b$-$ Assume that over the next three years dividends will grow as follows, $5$ percent next year, $15$ percent in year two, and $25$ percent in year $3.$ After that growth is expected to level off to a constant growth rate of $5$ percent per year, calculate the intrinsic value of the stock.

c$-$ Assume that Todd Mountain Development Corporation decides to issue a $20-$year coupon bond with semi$-$annual coupon payments, par value of $$1,000,$ and an annual coupon rate of $5\%.$ Calculate the fair price of this bond if the yield to maturity is $8\%.$