[1] Bond valuation (10 points)

You work for an asset manager specializing in bonds. You are expecting that the yield-to-maturity of Greek sovereign bonds will decline from 7.12% to 5.20% over the next two months. At the same time, you expect the yield-to-maturity of German sovereign bonds (with similar maturity, coupon rate and face value) to increase from 0.25% to 1.35%. Which bond should you buy? Which bond should you avoid?

[2] Dividend Discount Model (10 points)

Company A will pay a dividend of 1.30 per share today. The dividend per share is expected to be 1.365 next year. The rate of return required by equity investors is 14.78% and the value of the stock today is estimated at 13.96 according to the Dividend Discount Model in stable growth. What is the long-term rate of growth of dividends implied in this valuation?

[3] Bond Valuation Exercise (30 points)

(a) Compute the price / yield of the following bonds.

(b) Indicate which bond experiences the biggest price change (in percentage terms) when yields increase by 1%.

Issuer	Bosch	Bank of America	Nissan
Settlement	Today	Today	Today
Coupon	3.50%	2.75%	0%
Frequency coupon payment	1	2	Zero-coupon
Maturity	2 years from now	25 years from now	6 years from now
Face value	100	$100	100
Yield	2.2%	3.7%	6.3%
Price	.	.	.
New Yield	.	.	.
New Price	.	.	.
Percentage change	.	.	.

[4] Dividend Discount Model in stable growth (25 points)

Your task is to value the stock price of Harrington Ltd with the Dividend Discount Model (DDM) in stable growth. You have the following information:

Dividends per share DIV0	1.89
Risk-free rate rF	3.00%
Beta	1.182
Expected return on stocks	8.50%
Estimated long-term dividends growth rate	2.75%

Required: (a) Calculate the value of the stock of Harrington Ltd using the Dividend Discount Model (DDM) in stable growth; (b) The stock currently trades at 39.40 in the stock market; would you recommend buying it?

[5] Weighted Average Cost of Capital (WACC) (25 points)

Apple Inc. has 5,366,166,000 shares traded at a market value of $126 per share; its debt outstanding has an estimated market value of $90,883,140,000. The stock has a beta of 1.193. The expected return on stocks is 8.78%. The firm is rated AAA and paid 30% of its income as taxes. The risk-free rate is 2.47%, and the yield-to-maturity of Apples bonds is 3.27%.

A. What is Apples debt ratio?

B. What is Apples equity ratio?

C. What is Apples after-tax cost of debt?

D. What is Apples investors required return on equity?

E. What Apples cost of capital (after-tax WACC)?