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QUESTION $3$

a$)$ Bonds issued by Indah Corp. are presently priced at $$1,150.$ They have a $20-$year

maturity and a $6\mathrm{.}35$ percent annual coupon rate, although they can be called in $5$

years for $$1,067\mathrm{.}50.$ Assume that there are no costs other than the call fee to call

and refund the bonds, and that the yield curve is horizontal, with rates projected

to continue at present levels in the future. Calculate the rate of return could an

investor anticipate to receive if he or she acquires these bonds under these

conditions. $(10$ marks$)$

b$)$ A $$1,000$ par value bond with a maturity date of $25$ years has an annual payment

coupon of $8\mathrm{.}5$ percent. The bond is presently priced at $$925.$ Calculate the bond

price in $5$ years if the yield to maturity remains unchanged. $(5$ marks$)$

c$)$ The Laju Corporation has paid a dividend of $$0\mathrm{.}75$ per share, which is projected

to increase at a steady rate of $6\mathrm{.}50$ percent each year in the future. The beta of

the firm is $1\mathrm{.}25,$ the necessary market return is $10\mathrm{.}50$ percent, and the risk$-$free

rate is $4\mathrm{.}50$ percent. Calculate the current stock price of the company. $(5$ marks$)$

d$)$ The most recent dividend paid by the Zazar Company was $$1\mathrm{.}75.$ Its dividend

growth rate is projected to remain stable at $25\%$ for the next two years, after

which dividends are expected to rise at a rate of $6\%$ in perpetuity. It has a

required return $(rs)$ of $12\%.$

Calculate the best forecast for the current stock price.