Name:_____________________________________

1. Let’s assume XYZ Company intends to pay a $1 dividend per share next year (t=1). Assume your
required rate of return on XYZ company stock is 10%. (7 points)
a) If you expect the dividend to increase by 5% every year. What is the intrinsic value of one share
of XYZ Company? (3 points)

b) Let’s now assume that during the next few years XYZ Company’s dividends will increase rapidly
and then grow at a stable rate. Next year’s dividend (t=1) is still expected to be $1 per share, but
dividends will increase annually by 7%, then 10%, then 12%, and then steadily increase by 5%
after that forever. What is the intrinsic value of the one share of XYZ Company? (4 points)

2. The current prices of three US treasury bonds are as follows. Assume that coupons are paid yearly and
all bonds have a face value of $100 (7 points)

Maturity Coupon Rate Price

1 year 0% $97.474
2 year 5% $99.593
3 year 6% $100.148

a) What are the 1-, 2- and 3-year spot rates? (3 points)

b) What are the year 1 to 2 and year 2 to 3 forward rates – r 1(1Y) and r2(1Y)? (4 points)

3. Spot and futures prices for Gold and the S&P in September 2007 are given below (6 points)

September 2007 September 2008

COMEX Gold ($/oz) $693 $704.09
CME S&P 500 $1450 $1487.7

a) Use prices for S&P 500 to calculate annual risk-free rate. Assume that the dividend yield for S&P
500 is zero (3 points)

b) Calculate the net convenience yield on the Gold between September 2007 and September 2008 (3
points)