As a junior analyst in a small trading firm your responsibilities are to use some basic valuation methods using your finance skills. Predominately you investigate stocks and bonds and report your findings for further analysis. Your boss has tasked you to value a 4-year corporate bond with a face value of $1,000 which pays a semi-annual coupon of 8% p.a. The yield to maturity of similar rated bonds is 9% p.a. The bond is issued at its face value.

(A) Draw the relevant aspects of this bond using a cash flow diagram.

(3 marks)

(B) Based on your cash flows identify the intrinsic value of the bond.

(2 marks)

(C) After one year the price of the bond has decreased to $930 based on expectations of an increase in domestic interest rates. What is the Yield to Maturity of the bond?

(3 marks)

Your boss also wishes you to value a stock. This stock has just paid dividends of $0.32 per share. You estimate the growth rate in dividends at 3% p.a., growing indefinitely. Treasury bills currently pay 4% p.a. and the market risk premium over recent history is estimated at 5% p.a. Beta is estimated at 1.2 for this stock.

(D) Identify the required rate of return for the company.

(2 marks)

(E) Calculate the intrinsic value for this stock.

(2 marks)