Question

4. If you require a 12% rate of return, how much would you pay now for a bond with a face value of $6,000, pays $160 interest each year and matures in 10 years' time? (Round your answer to the nearest $10).

1. $2,840
2. $2,850
3. $2,860
4. $2,870
5. None of the above

5. Eclipse Textile Company Ltd generated an EPS this year of $4.30 and paid a dividendof $1.65 per share. Eclipse Textile Company has recently been able to generate a return of 13.50% p.a. on its (book) equity base. If these numbers are assumed to be fairly stable, what will be Eclipse Textile Company's expected future growth rate?

1. 9.25%
2. 8.32%    
3. 7.32%
4. 7.58%
5. None of the above   

** Please show the all mathematical steps and the Financial Calculator step if possible, Thanks.

Answer 1

Coupon rate = interest per year/par value*100 = 160/6000*100 = 2.667%

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =10

Bond Price =∑ [(2.667*6000/100)/(1 + 12/100)^k]     +   6000/(1 + 12/100)^10

k=1

Bond Price = 2835.99 = 2840

Dividend payout ratio = dividend/EPS = 1.65/4.3 = 0.3837

Growth rate=ROE*(1-payout ratio)

growth rate=13.5*(1-0.3837)

growth rate = 8.32