Question 1: Company Z's earnings and dividends per share are expected to grow indefinitely by 5 percent a year. If next year's dividend is $10 and the market capitalization rate is 8 percent, what is the current stock price?
Question 2: Company Z-prime is like Z in all respects save one: Its growth will stop after year 4. In year 5 and afterward, it will pay out all earnings as dividends. What is Z-prime's stock price? Assume next year's EPS is $15.
Question 3: KIC. Inc.. plans to Issue $5 million of perpetual bonds.The face value of each bond Is $1.000. The annual coupon on the bonds is 12 percent. Market Interest rates on one-year bonds are I 1 percent.With equal probability, the long-term market interest rate will be either 14 percent or 7 percent next year. Assume investors are risk-neutral.
a. If the KIC bonds are noncallable. what is the price of the bonds?
b. f the bonds are callable one year from today at $1.450. will their price be greater than or less than the price you computed In (a)?Why?