Question
Duncan recently completed ACST1001 and is hoping to apply what he has learned to start investing. Duncan is interested in a $1,000 18-year bond paying
Duncan recently completed ACST1001 and is hoping to apply what he has learned to start investing.
Duncan is interested in a $1,000 18-year bond paying half-yearly coupons with a coupon rate of 7.5%. The yield to maturity for such bonds is 8% p.a. compounding half-yearly.
Duncan is also considering investing in shares in a new company, Greene Daeye Ltd.
e) Duncan has predicted that the first dividend will be paid will be exactly two years from today, and amount to $4.5. From there, Duncan believes the dividend will grow at 25% p.a. for 4 years. After that, the dividend will grow at 3% p.a. indefinitely.
Based on the riskiness of this share, Duncan requires a return of 12% on his investment. Calculate the maximum price he is willing to pay for this share.
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