Problem 1: Valuation of Bonds and Shares (20 Marks) Suppose that Treasury Wine Estates (TWE) Corporation issued a bond with 11 years until maturity, a face value of $1,000, and a coupon rate of 8% (annual payments). The yield to maturity on this bond when it was issued was 7%. A. Is this bond currently trading at a discount, at par, or at a premium? Explain. (2 marks) B. What was the price of this bond when it was issued? (2 marks) C. Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment? (3 marks) D. Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment? (3 marks) Assume Fortescue Corporation will pay an annual dividend of $0.50 one year from now. Analysts expect this dividend to grow at 10% per year thereafter until the fifth year. After then, growth will level off at 4% per year. The firm's equity cost of capital is 6%. Use the dividend-discount model to answer the following questions. E. What is the present value of the first five dividend payments? (4 marks) F. What is the terminal price of Fortescue at time t=5? (3 marks) G. What is the value of a share of Fortescue stock now? If the firm's share price is currently trading at $20, will you sell or buy the shares? (3 marks) Problem 1: Valuation of Bonds and Shares (20 Marks) Suppose that Treasury Wine Estates (TWE) Corporation issued a bond with 11 years until maturity, a face value of $1,000, and a coupon rate of 8% (annual payments). The yield to maturity on this bond when it was issued was 7%. A. Is this bond currently trading at a discount, at par, or at a premium? Explain. (2 marks) B. What was the price of this bond when it was issued? (2 marks) C. Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment? (3 marks) D. Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment? (3 marks) Assume Fortescue Corporation will pay an annual dividend of $0.50 one year from now. Analysts expect this dividend to grow at 10% per year thereafter until the fifth year. After then, growth will level off at 4% per year. The firm's equity cost of capital is 6%. Use the dividend-discount model to answer the following questions. E. What is the present value of the first five dividend payments? (4 marks) F. What is the terminal price of Fortescue at time t=5? (3 marks) G. What is the value of a share of Fortescue stock now? If the firm's share price is currently trading at $20, will you sell or buy the shares
