Course: Introduction to Finance Assignment 2 Date: 9 November 2021 Question 1 (13 Marks) 1. Pepperoni Food Corporation has just issued a 10-years, with a face value of $1,000, 12% semi-annual coupon bond. The yield-to-maturity (YTM) on this bond is 14% compounded semi-annually. Based on bond properties, detennine whether this bond is currently trading at a discount, at par or at a premium Explain your answers. 3 marks b. Find the current price of this bond. Show all your calculations, 5 marks If the yield-to-maturity (YTM) on this bond remains constant, what will be the bond price in four years. Show all your calculations. 5 marks C. Question 2 (13 Marks) Bond Copper and Bond Silver both have a face value of $1,000, make 9% scii- annual coupons payments, and are priced at par value. Bond Copper has 3 years to maturity, whilst Bond Silver has 22 years to maturity. a. All other things remain the same, if interest rates unexpectedly rise by 3%. what would be the percentage change in the price of Bond Copper and Bond Silver? Show all your calculations. 5 marks All other things remain the same, if interest rates unexpectedly fall by 3%, what would be the percentage change in the price of Bond Copper and Bond Silver? Show all your calculations. b. c. 5 marks Referring to your answers in (a) & (b), what can you tell about the interest rate risk of longer-term bonds? 3 marks Sources: Ross, FCE, MiH; Kerk, Corporate Finance Brcaloy, PME, Pearson Pg. 1 of 4 Question 3 (13 Marks) Bond Star is a 4% semi-annual coupon bond while Bond Mars is a 12% semi-annual coupon bond. Both Bond Star and Bond Mars have 8 years to maturity, a face value of $1,000 and a yield to maturity of 10%. a. All other things remain same, if interest rates unexpectedly rise by 2%, what would be the percentage change in the price of Bond Star and Bond Mars? Show all your calculations. 5 marks b. All other things remain same, if interest rates unexpectedly fall by 2%, what would be the percentage change in the price of Bond Star and Bond Mars? Show all your calculations. 5 marks Referring to your answers in (a) & (b), what can you tell about the interest rate risk of lower coupon bonds? 3 marks C. Question 4 (9 Marks) a. Everest Group has issued a perpetual bond paying $1,000 coupon interests each year indefinitely. This perpetual bond, with a face value of $1000, is currently trading at a price of 30.000. Calculate the current interest rate of Everest Group's perpetual bond. Show all your calculations 3 marks You decide to pay $60,000 now to buy a perpetual bond, which will pay you and your inheritors $5,000 each year, forever, starting at the end of this year. b. If your required rate of return does not change, how much would you be willing to pay if this were a 30-year, annual payment, ordinary annuity instead of a perpetual bond? Show all your calculations. 6 marks Sources: Ross, FCE, MiH; Kerk, Corporate Finance Brcaley, PME, Pearson Py, 2 of 4 Question 5 (17 Marks) As a stockholder in Bio Lab, you receive its annual report. In the financial statements, Bio Lab has reported that the after-tax (net) income is $360 million. With 200 million shares of common stock outstanding, Bio Lab announced to distribute $150 million of dividends to its shareholders. The stock is now sold for $27 per share. 1 a. Find the earnings per share (EPS) of Bio Lab. 2 marks b. Find the historical price-caminys (PE) ralio of Bio Lab. 2 marks c. Suppose that Bio Lab does not have any outstanding debt. The current stock price reflects the fair value of the Company. What is the market value of Bio Lab before the ex-dividend date? ii. What is the market value of Bio Lab after the ex-dividend date? iii. What is the price per share of Bio Lab after the ex-dividend date? iv. Find the value of investor's wealth who holds 6,000 shares of Bio Lab before the ex-dividend date, Find the dividend income of an investor who holds 6,000 shares of Bio Lab until the ex-dividend date, vi. Find the value of shareholding on the ex-dividend date of an investor who holds 6.000 shares of Bio Lab. 10 marks d. Will it be different for the investor to sell his shares before the ex-dividend date or to hold his shares until the ex-dividend date which allows him to receive dividend? Suppose that the dividend is paid on the ex-dividend date. Explain by referring to your answers in part ( C ). 3 marks Show all your calculations. Sources: Ross, FCE, MiH; Kerk, Corporate Finance Brcaley, PME, Pearson Py. 3 of 4
