Question

Cassey Computer Ltd. has an outstanding issue of bond with a par value of $1,000, paying...

Cassey Computer Ltd. has an outstanding issue of bond with a par value of $1,000, paying 8 percent coupon rate semi‑annually. And, the company just paid a dividend of $2.70 per share. The dividends are expected to grow at 5.0 percent for next 2 years. i.e. year 1 and 2, and after year 2, dividends are estimated to grow at 4 percent thereafter indefinitely. Based on market information, government bond’s yield for 10-year maturity is 5 percent, market expected return is 15 percent, and beta of Cassey’s stock is 1.5. Assume no market friction and taxes.

Required:

  1. The bond of Cassey Computer Ltd. was issued 25 years ago and has 5 years to maturity. What is the value of the bond assuming 10 percent rate of current interest rate?

  1. If interest rate is expected to decrease, what characteristics and types of bonds would have better performance?

  1. Assume that the forecasted dividends and the required return are the same one year from now, as those forecasted today. What is the expected intrinsic value of the stock one year from now, just after the dividend has been paid in year one?

Homework Answers

Answer #1

a)

price of coupon = Coupon payment per period * [1-(1+i)^-n]/i + par value/(1+i)^n

i = interest rate per period

n = number of periods

Price = (80/2) * [1-(1+0.1/2)^-10]/(0.1/2) + 1000/(1+0.1/2)^10

= 922.78

b)

bonds with high coupon payments or coupon rate with longer time to matuity will be preferred

c)

Expected return = risk free rate + beta * market risk premium

= 0.05 + 1.5 * (0.15-0.05)

= 0.2 or 20%

value of stock = Present value of dividends + Horizontal value

Horizontal value = dividend next year/(Required return - growth rate)

= 2.7 * 1.05^2 * 1.04/(0.2-0.04)

= 19.348875

value of stock = 2.7*1.05^2/1.2 + 19.348875/1.2

= 18.61

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Cassey Computer Ltd. has an outstanding issue of bond with a par value of $1,000, paying...
Cassey Computer Ltd. has an outstanding issue of bond with a par value of $1,000, paying 8 percent coupon rate semi‑annually. And, the company just paid a dividend of $2.70 per share. The dividends are expected to grow at 5.0 percent for next 2 years. i.e. year 1 and 2, and after year 2, dividends are estimated to grow at 4 percent thereafter indefinitely. Based on market information, government bond’s yield for 10-year maturity is 5 percent, market expected return...
Cassey Computer Ltd. Has an outstanding issue of bond with a par value of $1,000, paying...
Cassey Computer Ltd. Has an outstanding issue of bond with a par value of $1,000, paying 8 percent coupon rate semi annually. And, the company just paid a dividend of $2.70 per share. The dividends are expected to grow at 5.0 percent for next 2 years. i.e. year 1 and 2, and after year 2, dividends are estimated to grow at 4 percent thereafter indefinitely. Based on market information, government bond’s yield for 10-year maturity is 5 percent, market expected...
a.  A bond that has a $1,000 par value​ (face value) and a contract or coupon...
a.  A bond that has a $1,000 par value​ (face value) and a contract or coupon interest rate of 10.1 percent. Interest payments are ​$50.50 and are paid semiannually. The bonds have a current market value of ​$1,128 and will mature in 10 years. The​ firm's marginal tax rate is 34 percent. b.  A new common stock issue that paid a ​$1.85 dividend last year. The​ firm's dividends are expected to continue to grow at 6.4 percent per​ year, forever....
Cotton On Ltd. currently has the following capital structure: Debt: $3,500,000 par value of outstanding bond...
Cotton On Ltd. currently has the following capital structure: Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20 years. Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each share is $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growth rate in...
QUESTION 3 SHARE AND BOND VALUATION [16 MARKS] A. Share Valuation A share has just paid...
QUESTION 3 SHARE AND BOND VALUATION [16 MARKS] A. Share Valuation A share has just paid a dividend of K10 and is expected to grow at a rate of 8 percent per year for the next two years. After that, it is expected to grow at 5 percent per year indefinitely. The required rate of return on the share is 10 percent. Calculate the value of the share B. Bond Valuation Calculate the value of a K1000 par value bond...
Q1.A 20-year, $1,000 par value bond has a 7.50% coupon rate with interest paid semiannually. The...
Q1.A 20-year, $1,000 par value bond has a 7.50% coupon rate with interest paid semiannually. The bond currently sells for $875. What is the capital gains yield on these bonds? Q2.U.S. Treasury 30 year maturity, zero coupon bonds are currently selling in the marketplace with a yield to maturity of 7.00%. Even though the bonds have a coupon rate of 0.00%, please assume semi–annual compounding, which is the bond market convention? If inflation increased unexpectedly, forcing the nominal required rate...
XYZ has ine share of stock and one bond. The total value of the teosecurities is...
XYZ has ine share of stock and one bond. The total value of the teosecurities is $1,100. The bond has a YTM of 12.60 percent,a coupon rate of 9.60 percent, and a face value of $1000; pays semi-annual coupons with the next one expected in 6 months; and matures in 3 years. The stock pays annual dividends that are expected to grow by 4.82 percent per year forever. The next dividend is expected to be $13.40 and paid in one...
IGA Ltd. currently has the following capital structure: Debt: $1,500,000 par value of outstanding bond that...
IGA Ltd. currently has the following capital structure: Debt: $1,500,000 par value of outstanding bond that pays annually 9% coupon rate with an annual before-tax yield to maturity of 8%. The bond issue has face value of $1,000 and will mature in 10 years. Ordinary shares: $2,500,000 book value of outstanding ordinary shares. Nominal value of each share is $100. The firm plan to pay a $5.50 dividend per share next year. The firm is maintaining 4% annual growth rate...
# 2 – Jay’s Grappling Gym has an outstanding bond that has a $1,000 par value...
# 2 – Jay’s Grappling Gym has an outstanding bond that has a $1,000 par value and a 6.5% coupon rate. Interest is paid semi-annually. The bond has 13 years remaining until it matures. Today the going interest rate is 10.5 percent, and it is expected to remain at this level for many years in the future. Compute the a) bond’s current yield, b) current gains yield that the bond will generate this year, and c) total return generated in...
A 20-year, semiannual coupon bond sells for $958.56. The bond has a par value of $1,000...
A 20-year, semiannual coupon bond sells for $958.56. The bond has a par value of $1,000 and a yield to maturity of 7.02 percent. What is the bond's coupon rate? A stock currently sells for $58. The dividend yield is 3.6 percent and the dividend growth rate is 4.9 percent. What is the amount of the dividend that was just paid?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT