Mel,Inc.stock is $135.00 per share.The company's semi-annual dividend is forecasted as $2.10 per share,indefinitely.What is the price of a zero-coupon equity-linked bond,promising to pay one share in 3 years,given annual interest rates of 5.0%?

Question

Quizplus · Accepted Answer

To calculate the price of the zero-coupon equity-linked bond, we need to discount the future price of the stock to the present using the given interest rate.

First, we need to calculate the future price of the stock in 3 years, which would be:
$135.00 + ($2.10 x 2) = $139.20

Next, we need to discount this future price back to the present using the annual interest rate of 5.0% (semi-annual rate of 2.5%). Using the formula for present value of a single amount, we get:

PV = FV / (1+r)^n
PV = $139.20 / (1+0.025)^6
PV = $123.45

Therefore, the price of the zero-coupon equity-linked bond is $123.45. Choice C is the best answer.

Mel,IncStock Is $135