Investment Management

(d) Given the following data, calculate the value for each security.

i. The current dividend paid to common stock holders of Telcon Corporation is $5 per share. Dividends are expected to grow at an annual rate of $12%. The market requires a rate of return of 18% per annum. What is the stocks current price? (2 marks)

ii. What is the value of preferred stock where the dividend rate is 9% on a $100 par value? The appropriate discount rate for the stock for this level of risk is 15%. (2 marks)

iii. The Pennington Corporation issued a new series of bonds on January 1, 1979. The bonds were sold at par ($1,000), have a 12 percent coupon, and would mature in 30 years, on December 31, 2008. Coupon payments are made semiannually (on June 30 and December 31). What was the price of the bond on January 1, 1984, 5 years later after issue, assuming that the yield to maturity is 10 percent? (3 marks)

In EACH case (i, ii and iii) above, explain how an investor would use the value of the security to decide if investing in the firm is worthwhile. (3 marks)