Question

AFRICANA’s 30- year bond pays 12 percent coupon interest semi-annually and has a par value of sh1, 000. If the bond currently selling at par, what is the bond’s yield to maturity (YTM) using the approximate method? [3 Marks] [c] What is the value of a preferred stock where the dividend rate is 16% percent on aSh100 par value? The appropriate discount rate for a stock of this risk level is 12 percent. [1 Mark] [d] Investors require a 15% rate of return on GDC’s common stock (Ks = 15%). What will be GDC’s stock value if the previous dividend was D0= Sh 2.00 and if investors expect dividends to grow at a constant compound annual rate is 10%?

Answer 1

>>>>>

C = annual coupon = sh1,000 * 12% = sh 120

F = Face value = sh 1,000

P = Selling price = sh 1,000

n = 30 years

Yeild to maturity formula using approximation method is

Yeild to maturity = [C + ((F-P)/n)] / [(F+P)/2]

= [sh 120 + ((sh 1,000 - sh 1,000)/30)] + [(sh 1,000 + sh 1,000)/2]

= sh 120 / sh 1000

= 0.12

= 12%

Therefore, Yeild to maturity under approximation method is 12%

>>>>>

Dividend = D = sh100 * 16% = sh 16

r = discount rate = 12%

Price of preference stock = D / r

= sh16 / 12%

= sh133.33333

Therefore, price of preference stock is sh133.33

>>>>>

Current dividend = D0 = sh 2.00

g = growth rate = 10%

ke = required rate of return = 15%

Expected dividend = D1 = D0 * (1+g) = sh 2.00 * (1+10%) = sh 2.20

Price of common stock = D1 / (ke-g)

= sh 2.20 / (15%-10%)

= sh 2.20 / 0.05

= sh 44

Therefore, expected price of common stock is sh 44.00