Consider a company that has a current dividend of $2.40, a required return on equity of 11% and an expected growth rate in dividends of 4%.

 

(a) Calculate the valuation of these shares today. 

 

(b) If the current market price of these shares is $28.59, what should you do? Why? 

 

(c) If markets are strong form efficient, is there any point in doing the valuation in Part (a)? Why?

 

 

2. Consider a semiannual 6% coupon bond with a $1,000 face value that has 8 years to maturity.

 

(a) Calculate the market price of this bond using a yield to maturity (YTM) of 5.4%. 

 

(b) Is the bond in Part (a) a premium, par or discount bond? Explain why. 

 

(c) Explain what is meant by the term YTM. 

 

 

3. Consider a potential investment project that has an initial cash outlay of -$2,000 now and free cash flows of $600, $700 and $800 over the next three years.

 

(a) If the appropriate discount rate is 10%, calculate the net present value (NPV) of this project. Should the project be accepted or rejected? Explain why. 

 

(b) Without doing any calculations, explain what would happen to the NPV you calculated in Part (a) if you used a discount rate of 8%.