A) Sintokyo Berhad’s seven-year RM1,000 par bonds pay 9 percent interest. Your required rate of return is 7 percent. The current market price for the bond is RM1,100.
i. Determine the expected rate of return
ii. What is the value of the bonds to you given your required rate of return ?
iii. Should you purchase the bond at the current market price?
B) The common stock of AMT paid RM1.32 in dividends last year. Dividends are expected to grow at an 8 percent annual rate for an indefinite number of years.
i. If AMT’s current market price is RM23.50, what is the stock’s expected rate of return?
ii. If your required rate of return is 10.5 percent, what is the value of the stock for you?
iii. Should you make the investment, and why
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