Answer:
a. $153.71
Explanation:
First, calculate the yearly dividend
First-year dividend = $2.80 x ( 1 + 21% ) = $3.388
Second-year dividend = $3.388 x ( 1 + 21% ) = $4.099
Third-year dividend = $4.099 x ( 1 + 21% ) = $4.960
Fourth-year dividend = $4.960 x ( 1 + 21% ) = $6.002
Now calculate hte terminal value of the dividend payment after 4 years
Terminal value = Fourth year dividend x ( 1 + Growth rate after year 4 ) / ( Required rate of return - Growth rate after year 4 ) = $6.002 x ( 1 + 5% ) / ( 8.30% - 5% ) = $190.97
Now use the following fromula to calcula the value of the bond
Value of the bond = ( First-year dividend / ( 1 + Required rate of return )^1 ) + ( Second-year dividend / ( 1 + Required rate of return )^2 ) + ( Third-year dividend / ( 1 + Required rate of return )^3 ) + ( Fourth-year dividend / ( 1 + Required rate of return )^4 ) + ( Terminal Value / ( 1 + Required rate of return )^4 )
Value of the bond = ( $3.388 / ( 1 + 8.3% )^1 ) + ( $4.099 / ( 1 + 8.3% )^2 ) + ( $4.960 / ( 1 + 8.3% )^3 ) + ( $6.002 / ( 1 + 8.3% )^4 ) + ( $190.97 / ( 1 + 8.3% )^4 )
Value of the bond = $3.128 + $3.495 + $3.905 + $4.363 + $138.820
Value of the bond = $153.711
Value of the bond = $153.71
