Question 4

a) APPLE Corporation, ORANGE Corporation, and GRAPE Corporation each will pay a dividend of $2.35 has a growth of 5%. The required return for each corporation are shown below:- Corporation Required return APPLE 8% ORANGE 11% GRAPE 14% You are required to:

i) Calculate the stock price for each company. (6 marks)

ii) Comment on stock price and required return relationship referring to your calculation above. (4 marks)

b) Suppose a corporation's stock is currently sells for $47 per share and the required return on the stock is 11%. Besides, the total return on stock is equally divided between a capital gains yield and a dividend yield. If the corporation's policy is to achieve constant growth rate in its dividends, determine the current dividend per share. (4 marks)

c) ABC Company has outstanding $1,000 par value 4% coupon bonds that make semi-annual payments, and have 10 years remaining to maturity. If the current price for these bonds is $938.57, compute its annualized yield to maturity. (4 marks)

d) The XYX Corporation has a bond currently outstanding. It has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first 6 years, then pays $1,200 every six months over the subsequent eight years, and finally pays $1,500 every six months over the last six years. If the required return on this bond is 12 percent compounded semi-annually, determine its current price. (7 marks)