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## BUS 401 Week 2, DQ 2, Bond and Common Stock

by: kimwood Notetaker

14

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2

# BUS 401 Week 2, DQ 2, Bond and Common Stock

Marketplace > BUS 401 Week 2 DQ 2 Bond and Common Stock
kimwood Notetaker
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BUS 401 Week 2, DQ 2, Bond and Common Stock
COURSE
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PAGES
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This 2 page Study Guide was uploaded by kimwood Notetaker on Friday November 13, 2015. The Study Guide belongs to a course at a university taught by a professor in Fall. Since its upload, it has received 14 views.

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Date Created: 11/13/15
Bonds and Common Stock From Chapters 7 and 8 complete Study Problems 7­8 (pages 224­225) and 8­16 (page 253) and post the answers to the  discussion board. Remember to complete all parts of the problems and report the results of your analysis. Do not forget to  show the necessary steps and explain how your attained that outcome. Respond to at least two of your classmates’  postings. 7­8.   (Bond valuation) ExxonMobil 20­year bonds pay 9 percent interest  annually on a \$1,000 par value. If bonds sell at \$945, what is the bonds’  expected rate of return? Annual interest: \$90 Annual amortization of purchase discount: \$55/20yrs. = \$2.75 Total annual return: \$92.75 Annual Yield: 92.75/945 = 9.788% 8­16. (Common stock valuation) The common stock of NCP paid \$1.32 in  dividends last year. Dividends are expected to grow at an 8 percent annual rate for an indefinite number of years.   The common stock of NCP paid \$1.32 in dividends last year. Dividends are expected to grow at an 8 percent annual rate for  an indefinite number of years.   a. If NCP's current market price is \$23.50 per share, what is the stocks expected rate of return?   D1 = \$1.32 × 1.08 = \$1.4256   Re=D1+g        ­­­­        P0  = \$1.4256 + 0.08    ­­­­­­­­­­­­    \$23.50 = 14.07%   b. If you required rate is 10.5 percent, what is the value of the stock for you?  Investor's Value                       =       Dividend in year 1/ Required Rate of return ­  growth rate                                          =       \$1.32(1.08)                                                    ­­­­­­­­­­­­­­­                                                   0.105­0.08                                         =         \$57.02     c. Should you make the investment?   Yes, the expected rate of return of 14% is greater than the required rate of return of 10.5 %.  and the value of the stock \$57.02 is larger than the current market price \$23.50.

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