Which of the following can cause an increase in the price of a discount bond? a. An increase in the YTM. b. A decrease in the YT
1 answer:
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Answer:
$73.47
Explanation:
2.87 is the current dividend paid (D0)
Use that to find dividends for the next 5 years;
D1 = D0(1+g) ; g being the growth rate
D1 = 2.87(1.08) = 3.0996
D2 = 3.0996(1.08) = 3.3476
D3 =3.3476(1.08) = 3.6154
D4 = 3.6154(1.08) = 3.9046
D5 = 3.9046(1.08) = 4.2170
Next, find terminal cashflows;
D6 (yr 2024) = 4.2170 (1.03) = 4.3435
Find Present values of all the dividends using the 8% discount rate with the formula; PV = FV/
PV(D1) = 2.87
PV(D2) = 2.87
PV(D3) = 2.87
PV(D4)= 2.87
PV(D5)= 2.87
PV of terminal value; PV(D6 onwards) = = 59.1223
Sum up the PVs to find value per share;
$2.87 +$2.87 +$2.87 +$2.87 +$2.87+ $59.1223 = $73.47