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a) Shares for ABC Ltd are currently available on the market. You expect the company to pay its first dividend exactly two years from today,

a) Shares for ABC Ltd are currently available on the market. You expect the company to pay its first dividend exactly two years from today, and then every year after that.

Using the Dividend Discount Model (DDM), you estimate the intrinsic value of ABC Ltd is $8. The constant dividend growth rate, after the first dividend is paid, is estimated as 5%, and the required rate of return is 14% per annum.

Calculate the dividend per share you expect ABC Ltd to pay two years from today. (2 marks)

b) ABC Ltd just announced that it is not expected to pay any dividends for the next 4 years. Instead, ABC Ltd. Is now expected to pay its first dividend of $3.5 exactly 5 years from now. This dividend is expected to grow at 30% per annum for the following 2 years, and then 2% per annum thereafter.

If the rate of return is 22% per annum, what is the current value of a share in ABC Ltd? (3 marks)

c) After doing some market research, you also notice that ABC Ltd also has preference shares. Describe three differences between ordinary shares and preference shares. (3 marks)

d) ABC Ltd also issues two different bonds, an 8-year coupon bond and a 10-year coupon bond with the same yield to maturity. The two bonds also have the same coupon rate. Explain which bond you would buy if interest rates are expected to drop in the future. (2 marks)

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