Question
A fund manager is required to submit an investment proposal to the Investment Committee on the merits of investing in ABC Corp. As an investment
A fund manager is required to submit an investment proposal to the Investment Committee on the merits of investing in ABC Corp. As an investment analyst supporting the team, you have been asked to assist in analysing the bonds and common stock of the company. You have found the company to have a target capital structure of 70% equity and 30% debt, and gathered the following information:
Current price of bonds: 97% of par
Bonds par value: $1000 Coupon rate: 8%
Earnings per share- most recent year:$2.00
Expected growth rate of dividends:5.10%
Dividend payout ratio: 60%
Required rate of return: 12.60%
Current price of common stock: $18
Calculate the companys share price using the Dividend Discount Model, and determine whether it is worth investing at current price.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started