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Q: Need today or by morning #3 ( Answered ,   1 Comment )
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 Subject: Need today or by morning #3 Category: Business and Money > Finance Asked by: yourtime4mymoney-ga List Price: \$10.00 Posted: 11 May 2005 21:49 PDT Expires: 10 Jun 2005 21:49 PDT Question ID: 520747
 ```1. Calculating Rates of Return. You?re trying to choose between two different investments, both of which have up-front costs of \$40,000. Investment G returns \$70,000 in six years. Investment H returns \$120,000 in 12 years. Which of these investments has the higher return? 2. Zero Coupon Bonds. Suppose your company needs to raise \$15 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you?re evaluating two issue alternatives: an 8 percent annual coupon bond and a zero coupon bond. Your company?s tax rate is 35 percent. How many of the coupon bonds would you need to issue to raise the \$15 million? How many of the zeroes would you need to issue? 3. Stock Valuation. Creed Corp. will pay a dividend of \$4 next year. The company has stated that it will maintain a constant growth rate of 5 percent a year forever. If you want a 15 percent rate of return, how much will you pay for the stock?``` Request for Question Clarification by livioflores-ga on 11 May 2005 23:26 PDT ```Hi!! Am I right if assume that here is a copy and paste typo and you are asking only for the answer to the problem #3 in this question?``` Clarification of Question by yourtime4mymoney-ga on 11 May 2005 23:30 PDT `yes, you are correct, this is only for #3.`
 ```Hi again!! The Constant Growth Formula for stock valuation assumes that a company grows at a constant rate forever, and states that: P = D1 / (Ks - G) Where: P = Price D1 = The next dividend Ks = Rate of Return G = Growth Rate So for Creed Corp. we have that: P = \$4 / (0.15 - 0.05) = = \$4 / 0.10 = = \$40 You must pay for the stock \$40 . For references on stck valuation see: "Stock Valuation": http://teachmefinance.com/stockvaluation.html "Basis for Valuation of Financial Securities": http://www.ssc.uwo.ca/bacs/courses/310/peters/VALUATION%20OF%20FINANCIAL%20SECURITIES%20FOR%20FINAL%20EXAM.pdf I hope that this helps you. Please do not hesitate to request for any clarification needed. Regards. livioflores-ga```
 ```Regarding to the problem #2 the following page could be useful: "Introduction to bonds". See from slide 17, where the Pricing Bonds section starts. http://www.bus.indiana.edu/anellul/F303_Eight%20Class.ppt```