Question 1. Quick Silver Ltd is looking for financial investment in the securities market. Two investment options are available in different securities: Bonds and ordinary shares.
- Treasury bond: the bond is paying 10% coupon rate. Interest is paid semiannually. The bonds have a face value of $1,000 and will mature 25 years from now.
- Commonwealth Bank ordinary share: the share just paid a dividend of $6.50 per share. The Company Management agreed on steady growth of 5% in dividends and earnings over the foreseeable future. The required rate of return for shares of this type is 18%.
- Compute the current value of the Treasury Bond if the YTM of the bond is 7% annually;
- Calculate the current value of Commonwealth Bank ordinary shares.
Question 2: Smart Learning Company issued preferred shares and plans to pay a dividend rate of 15%. The share has the face value of $100. The required rate of return for shares of this type is 12%.
- Calculate the current price of this preferred share?
- What is the current price of this preferred share if the required rate of return is 16% now?
Question 3: Blooming Ltd. currently has the following capital structure:
Debt: $2,500,000 par value of outstanding un-callable bond that pays annually 12% coupon rate with a yield to maturity of 10%. The bond has face value of $1,000 and will mature in 25 years.
Ordinary shares: 65,000 outstanding ordinary shares. The firm plans to pay a $7.50 dividend per share in the next financial year. The firm is maintaining 3% annual growth rate in dividend, which is expected to continue indefinitely.
Preferred shares: 40 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 14%.
Required: Complete the following tasks:
- Calculate the current price of the corporate bond?
- Calculate the current price of the ordinary share if the average return of the shares in the same industry is 9%?
- Calculate the current value of the preferred share if the average return of the shares in the same industry is 12%
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