Auschamp Ltd. has an outstanding issue of bond with a par value of $1,000, paying 8 percent coupon rate semi-annually. And, the company just paid a dividend of $2.70 per share. The dividends are expected to grow at 5.0 percent for next 2 years. i.e. year 1 and 2, and after year 2, dividends are estimated to grow at 4 percent thereafter indefinitely. Based on market information, government bonds yield for 10-year maturity is 5 percent, market expected return is 15 percent, and beta of Auschamps stock is 1.5. Assume no market friction and taxes.

Required:

(a) The bond of Auschamp Ltd. was issued 25 years ago and has 5 years to maturity. What is the value of the bond assuming 10 percent rate of current interest rate?

(b) Calculate the duration of Auschamp Ltd. Bond today.

(c) If interest rate is expected to increase, what characteristics and types of the bonds and stocks would have a better performance?

(d) Assume that the forecasted dividends and the required rate of return are the same one year fromnow,asthoseforecastedtoday. Whatistheexpectedintrinsicvalueofthestockone year from now (t=1), just after the dividend has been paid in year one?

(e) As an investor, you would like to include Auschamps securities into your portfolio. However, based on your risk tolerance, you prefer a balance portfolio consisting both Auschamps bond and stock. You have a 3 years financial plan to grow your current investment amount by compounding it at targeted 13 percent per annum. Assume the yield curve is flat and the risk perceived by investors on Auschamps stock is unchanged. Show your working how you could achieve your goal.