# 1. Heleveton, Inc. currently pays a dividend of \$1.20 per share. Dividends are expected to increase at the rate of \$0.10 per share for the next eight years. Determine the current value of Heleveton`s common stock to an investor who expects to be able to s

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FINC 610

Homework Assignment 4 (9 marks)

(Individual work)

Heleveton, Inc. currently pays a dividend of \$1.20 per share. Dividends are expected to increase at the rate of \$0.10 per share for the next eight years. Determine the current value of Heleveton`s common stock to an investor who expects to be able to sell the stock for

\$28 after 5 years. Assume that the investor requires a 12 percent rate of return on the security.

You are an analyst studying Beranek Technologies, which was founded 10 years ago.  It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend.  Management has indicated that it plans to pay a \$0.50 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter.  Your forecast of the future dividend stream, along with the forecasted growth rates, is shown below.  Assuming a required return of 11.00%, what is your estimate of Beranek`s current intrinsic value?

 Year 0 1 2 3 4 5 6 7 Growth rate NA NA NA NA 50.00% 25.00% 8.00% 8.00% Dividend \$0.00 \$0.00 \$0.00 \$0.50 \$0.75 \$0.94 \$1.01 \$1.09

Zero current div, non-constant then constant growth

Required return 11%

In September 2014 you are considering buying a government bond. In your system you see a government bond that expires in September 2024. The annual coupon rate is 5 percent. The principal is EUR 1,000. Interest is paid each March and September. The market interest rate is 3 percent per year.

a) What is the price of the bond? If the bond is currently trading at  EUR 1,180, calculate the YTM? Would you buy and/or sell? (Explain)

b) If the market interest rate unexpectedly increases, what effect would you expect this increase to have on the price of the bond? (Please give full explanation)

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