Dawn,Inc.stock is $37.00 per share.The company's semi-annual dividend is forecasted as $0.25 per share,increasing every 6 months by 20.0%.What is the price of a zero-coupon equity-linked bond,promising to pay one share in 4 years,given annual interest rates of 6.0%?
A) $32.29
B) $33.49
C) $34.39
D) $35.69

Question

Quizplus · Accepted Answer

Using the dividend discount model, we can calculate the present value of the semi-annual dividends:

PV = (0.25/(1+0.20)^1) + (0.25/(1+0.20)^2) + (0.25/(1+0.20)^3) + (0.25/(1+0.20)^4) = 0.912

Using the present value of a single amount formula, we can calculate the price of the zero-coupon equity-linked bond:

Price = (37.00 * 0.912) / (1 + 0.06)^8 = $33.49

Therefore, the best choice is B as it matches the calculated price of the zero-coupon equity-linked bond.

Dawn,IncStock Is $37