If opportunity cost is 8%,
What is the value of a share that is expected to pay a dividend of 20p next year, and have growth in perpetuity of 4%?
Also, what is the value of a bond that will pay interest of £100.00 a year for the next 3 years and at the end of year 3 repay the initial capital of £1000?
Another question is:
If I buy a house and will need to take out a repayment mortgage of £150,000 over 25 years. The building society has stated that the annual percentage rate will be 6%.
How much is the monthly repayment?
Please help
re FIN:
so how about the 4% growth rate in question 1?
A1. that would be
Perpetuity value = coupon/rate
Plus
Opportunity cost = 8% coupon of the current share price
plus
current price of the share then add the 20p
This is under the Efficient market hypothesis, which suggests that the information will be made available in the market and should then be reflected in the price of the share. therefore tha value changes according to the announced dividend and the potential future returns.
A2.) PV = coupon/rate [1 - 1/(1+rate)^n] + Maturity value/(1+rate)^n
Therefore
PV= 100.00/10% [1-1/(1+10%)^3]+1000.00/(1+10%)^3