1. The present value of a stock paying $1.5 dividends for the next 6 years and $5 dividends forever after is calculated to be $41.5575 using the dividend payment amounts, an 8% discount rate, and present value factors. 2. The present value of a bond paying $25 coupon payments every 6 months for 8 years and then a $1000 lump sum is calculated to be $1,067.24. The calculation uses the coupon payment amount, 2% semi-annual discount rate, and present value factors over the 16 periods.

1. 1.Calculate the present value of a stock if this pays $1.5 dividend in the next 6 years and then in
year 7 and thereafter it pays $5 constant dividend forever. Interest rate is 8%. Show work and
explain.
2. Calculate the present value of a bond that pays $25 per six months periodic coupon payment
for the next 8 years and at the end of the 8th year the bond pays a lump sum of $1000. The
opportunity cost for the bond investors is 4% per year. Explain and show work.
Solution
A) B) Year Dividend PV factor @ 8% PV Period (Half year) Inflows PV factor @ 2% PV 1 1.5
0.925 1.3875 1 Â Â Â Â Â Â Â Â 25 0.98 Â Â Â Â Â 24.50 2 1.5 0.857 1.2855 2
        25 0.961      24.03 3 1.5 0.794 1.191 3         25 0.942
     23.55 4 1.5 0.735 1.1025 4         25 0.924      23.10 5 1.5
0.681 1.0215 5 Â Â Â Â Â Â Â Â 25 0.905 Â Â Â Â Â 22.63 6 1.5 0.63 0.945 6
        25 0.8879      22.20 7 1.5 0.583 0.8745 7         25
0.87 Â Â Â Â Â 21.75 8 62.5 0.54 33.75 8 Â Â Â Â Â Â Â Â 25 0.853 Â Â Â Â Â 21.33 PV
of Stcock - 41.5575 9 Â Â Â Â Â Â Â Â 25 0.836 Â Â Â Â Â 20.90 10 Â Â Â Â Â Â Â Â 25
0.82 Â Â Â Â Â 20.50 11 Â Â Â Â Â Â Â Â 25 0.804 Â Â Â Â Â 20.10 12
        25 0.788      19.70 13         25 0.77     Â
19.25 14 Â Â Â Â Â Â Â Â 25 0.7578 Â Â Â Â Â 18.95 15 Â Â Â Â Â Â Â Â 25 0.743
     18.58 16         25 0.728      18.20 16    1,000 0.728
   728.00 PV of Bond - 1,067.24