Neville buys the following investments:One 10-year 100 par value bond with 6% semi-annual coupons• One share of a stock that pays semi-annual dividends and has a long-run dividend growth rate of2% compounded semi-annually. The next dividend of $4.50 is payable in six months.The current market yield rate is 3% compounded semi-annually. In four years the market yield rateIncreases to 8% compounded semi-annually.In 4 years, Neville sells both investments immediately after the coupon and dividend are paid.Calculate the price he would receive if he sells them at their market value.

Market value of bond is the amount of bond at which an investor is willing to purchase the unit of…

Answered: Calculate the price he would receive if…

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Calculate the price he would receive if he sells them at their market value.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 8P

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

100%

Neville buys the following investments:
One 10-year 100 par value bond with 6% semi-annual coupons
• One share of a stock that pays semi-annual dividends and has a long-run dividend growth rate of
2% compounded semi-annually. The next dividend of $4.50 is payable in six months.
The current market yield rate is 3% compounded semi-annually. In four years the market yield rate
Increases to 8% compounded semi-annually.
In 4 years, Neville sells both investments immediately after the coupon and dividend are paid.
Calculate the price he would receive if he sells them at their market value.

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