(Solved): (a) Elixir Drug Company is enjoying rapid growth from the introduction of its new backrub ointment. ...

(a) Elixir Drug Company is enjoying rapid growth from the introduction of its new backrub ointment. The dividend for a share of Elixir's stock a year from today will be K1.15. During the next four years, the dividend will grow at 15 percent per year, thereafter will drop to 12 percent for another three years due to tough competitors. After that, growth will be equal to 10 percent per year indefinitely. What is the current value of a share of stock if the required return is 15 percent? [15 marks] (b) Geneva Electronics Co. issues a K1,000 face value, eight-year zero coupon bond. What is the yield to maturity on the bond if the bond is offered at K627? [Assume annual compounding]