a) CIT plc has an outstanding issue of 1,000-par-value bonds issued 5 years ago with a 12% coupon interest rate. The issue has initial maturity of 20 years and pays interest semiannually.

i) What is the value of each CIT plc bond if bonds of similar risk are currently earning a ten percent rate of return.

ii) If you are offered an opportunity to invest in these MGP plc bonds at the current market price of 1,190per bond, should you accept this offer? Critically explain why.

b) ABC plc has paid the following dividends over the past seven years:

Year

Dividend per share

2014

2.35

2013

2.28

2012

2.10

2011

1.95

2010

1.82

2009

1.80

2008

2007

1.73

1.61

i) Based on the information provided above, apply Gordons growth model to compute the dividend growth rate.

ii) If you can earn 13% percent on similar-risk investments, what is the most you would be willing to pay per share?

c) The six-month interest rate of Austrilian dollar is 9 percent while the six-month interest rate for US dollar is 6.75 percent. At the same time, the spot Austrilian dollar quotation in New York is US$0.9100 and the six-month forward rate is US$0.9025.

Analyse the information provided above to answer the following questions:

i) Critically evaluate whether there is interest rate parity in this situation. Provide relevant calculations to support your answer.

ii) Critically discuss whether, and how, it might be possible to make a profit in this situation.