Overview
Bond and Stock Valuation and Analysis
Answer question 6A and 6B Only
(a) Your company has determined that it needs to raise $8,750,000 to fund the purchase of a new office. As the manager, you intend to issue 7-year bonds with semi-annual coupon payments and will use the proceeds of the bond issue for that purpose. The market interest rate for such bonds is 8%. Coupon payments will be made at a rate of 9.0%.
1.Calculate the price of these 9.0% coupon bonds. (8 marks)
2.State and explain whether these bonds are premium or discount bonds. (3 marks)
3.How many of these 9.0% coupon bonds would your company issue? (3 marks)
4.Calculate the price of these bonds, if they paid no coupons to investors. Assume semi-annual coupons for similar coupon bonds. (5 marks)
5.How many of the zero-coupon bonds would your company need to issue? (3 marks)
6.Why are long-term bonds more sensitive to changes in interest rates than short-term bonds? (5 marks)
b). Assume your firm is not expected to pay dividends for the next 10 years because of its growth and capital expenditure (Capex) needs. The board intends to pay its first dividend of $2 per share 11 years from now. Further, you expect the dividends to increase at a rate of 25% per year for 3 years after that. At that point, the dividends will grow at 9% per year thereafter. If the required rate of return for this type of company is 14%, as the manager, what do you expect to be the price of your company’s shares based on the dividend discount model?