Yesterday Dexter’s Lab paid a dividend of $2.00 a share on its common stock

| February 2, 2016

Question
Yesterday Dexter’s Lab paid a dividend of $2.00 a share on its common stock. The firm’s earnings and dividends are expected to grow indefinitely at 5%, and the market requires a 15% rate of return on Dexter’s common stock. ?Ten years ago you purchased a convertible debenture of Dexter’s Lab. At that time, the bond had 15 years left to maturity and its yield to maturity was 14% a year, compounded semi-annually. The $1,000 par value bond pays an annual coupon of 12%, compounded semi-annually. The bond is convertible into Dexter’s common stock at a conversion price of $20 a share. ?

{a} What price did you pay for the bond? ?

{b} What annual internal rate of return did you earn over the last 10 years if you convert the bond today? ?

{c} What annual rate of return did you earn over the last 10 years if, instead of converting, you surrender the bond when it is called today at $1,090?

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