A client is interested in two investments an offshore bond and shares in a local company.

The client$$s opportunity cost is $12\%[$this means that the client can make $12\%$ on other

investments$].$ Assume the EURO: Rand exchange rate is EUR $1$:R$15$ throughout the period of the

bond. The dividend for the share is the expected dividend at the end of year one $($D$1)$ and not the

current dividend $($D$0).$

Conditions BZA Bond XTY Ltd $$ Shares

Total nominal value

EUR $8500000$

Total market value of shares

$(100000$ shares x R$1000$ price per share$)$

R$100000000$

Market value of the bond

R$100000000$

Coupon $($fixed$)$

$7\%$

Interest payments

Interest is paid out on the bond each year

Dividends per share per annum $(100000$ shares$)($D$1)$

R$100$

Expected dividend growth rate

$5\%$

Issue date$/$Purchase date

$1$ January $2020$

$1$ January $2020$

Maturity date

$1$ January $2025$

$19$

You are required to use the investment information provided

You are required to use the investment information provided aboveabove to answer the following to answer the following questions:questions:

$($a$)$ Determine if the present

$($a$)$ Determine if the present value of each investment$$s future cash flows is greater than or value of each investment$$s future cash flows is greater than or smaller than its current market value.smaller than its current market value. $(10$ marks$)(10$ marks$)$

$($b$)$ Calculate the return $($or yield to maturity$)$ for each investment.

$($b$)$ Calculate the return $($or yield to maturity$)$ for each investment. $(10$ marks$)(10$ marks$)$

$($c$)$ Comment on whether each option $($the bond and the shares$)$ is a good investment in view

$($c$)$ Comment on whether each option $($the bond and the shares$)$ is a good investment in view of your answer to $($a$)$ and $($b$)$ above.of your answer to $($a$)$ and $($b$)$ above. $(5$ marks$)(5$ marks