Lincoln Park Co. has a bond outstanding with a coupon rate of 5.73 percent and semiannual payments. The yield to maturity is 6.7
1 answer:
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Answer:
a. 9.04%
b. 4.96% approx.
c. 10%
Explanation:
a. As per dividend growth model,
Required rate of return =
wherein, = Next year expected dividend
= Current market price of a share as on today
g = Annual growth rate in dividend ( in percentage)
r = Rate of return or cost of equity
Hence, required rate of return (r) = = 9.04%
b. R = 12%
= $24
= $1.69
Then, using the above formula, we have,
.12 =
⇒ g = 4.96 % approx
c. g = 3%
Retention ratio (b) = 30%
Hence dividend payout ratio = 1 - 30 = 70%
g = b × r
.03 = .3 × r
⇒ r = 0.1 or 10%
Hence, rate of return earned by the firm on its's new investment is 10%.