Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please answer the following questions. 1)A firm has just issued a bond that has a face value of $1,000, a coupon rate of 8 percent

Please answer the following questions.

1)A firm has just issued a bond that has a face value of $1,000, a coupon rate of 8 percent paid semi-annually, and matures in 8 years. The bonds were issued at a discount ($950.35) with a yield to maturity of 8.88%. Assume that 3 years from now, the bond trades to earn an effective annual yield to maturity of 10%. At what price should this bond be trading for at the beginning of year 4? (4 marks)

2) a)You are a stock analyst in charge of valuing high-technology firms, and you are expected to come out with buy-sell recommendations for your clients. You are currently analyzing a firm called etalk.com that specializes in internet-based communication. You are expecting explosive growth in this area. However, the company is not currently profitable even though you believe it will be in the future. Your projections are that the firm will pay no dividends for the next 3 years. Four years from now, you expect the stock to pay its first dividend of $1 per share. You expect dividends to increase at a rate of 20 percent per year for three years after that. At that point, the industry will start to mature and slow down;dividends will continue to grow but only at a rate of 10 percent per year for the foreseeable future.The stock is priced in the market at $20 per share. If you believe that a fair rate of return on a stock of this type is 14 percent, what is your estimate of the value of the stock, and should you issue a recommendation to buy or to sell? (6 marks)

b)The day after you make your estimate in part (a), new information indicates that things are not going as smoothly as predicted for this business. Your estimates of the initial dividend and the growth rates remain the same, but the timing has changed. You now estimate that the firm will pay its first dividend ($1) in 6 years. The high-growth period (20 percent per year) will last for only two years before slowing to growth of 10 percent per year for the foreseeable future.Given a rate of return of 14 percent, what is your new estimate of the value of the stock,and should you change your recommendation (assuming the stock is still priced in the market at $20)? (3 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals of Financial Management

Authors: Eugene F. Brigham, Joel F. Houston

15th edition

1337671002, 978-1337395250

More Books

Students also viewed these Finance questions